Like McHenry’s employer, thousands of U.S. companies lease equipment each year, many of them without careful attention to potential blunders. Rod McHenry became victim to one possible pitfall, but there are several areas deserving careful attention.

Falling For Lowest Rate

One potential pot-hole facing many would-be lessees is basing their lease decision solely on lowest monthly payment. Even on face of it, making a decision based on monthly payment makes little sense. First, these amounts give only a partial picture of total lease pricing. An accurate discounting of cash flows using a present value analysis, including up-front lease payments, monthly payments, security deposits and fees can often change outcome of lowest lease bid. Making sure that each lease proposal is reduced to a present value calculation guarantees that you will be comparing apples to apples. Even if you make accurate price comparisons, pricing all by itself fails to consider several important factors – ones that might save you a bundle in long run and keep your firm from blundering. To avoid pitfalls in this area, list and evaluate your top priorities for a leasing arrangement. Consider factors such as: choosing right leasing partner, balance sheet considerations, tax considerations, choosing right form of lease, avoiding severe lease terms, and getting enough lease flexibility.

Failing to Check Lessors’ References and Financial Condition

As Rod McHenry discovered, perhaps area with greatest potential for a misstep is lessor selection. Failing to investigate and make a wise choice of leasing partner can result in transaction delay, misrepresentations, nonperformance, unexpected fees or even fraud. Like many industries, equipment leasing encompasses many players with varying degrees of experience, specialization, integrity and financial strength. In selecting best leasing partner, get sufficient information from bidders to perform an effective reference check. If possible, also obtain financial information from bidding lessors to evaluate their financial condition. Obtain Dunn and Bradstreet reports on each bidder. Ask for and check customer, vendor, bank and trade references. Perform an Internet news and message board search to make sure bidding lessors are not subject of any unresolved problems or scandals. Most reputable lessors belong to one of major equipment leasing trade associations (ELA, EAEL, UAEL, or NAELB). Call appropriate association for a reference. Lastly, ask around. Check with your attorney, accounting firm, banker, friends and associates who are able to make recommendations based on past experiences.

Not Fully Understanding Lease Agreement

Failing to read and understand major terms and conditions of equipment lease can cost your company a bundle. While most lease agreements include similar terms and conditions, there can be noticeable differences. For example, most agreements cover lessee’s responsibility to pack equipment and ship it to lessor at end of lease, if lessee chooses to return equipment. Some leases require lessee to have this done by last day of lease, perhaps depriving lessee of a week or more of use. Also, some agreements require lessee to pay for equipment de-installation, packing and shipping to any destination within US, which can be costly. You can save money by negotiating many of these points. Read lease agreement thoroughly, get legal advice if necessary, and negotiate points that can save you money.

Making Wrong Choice Between Fair Market Value and Bargain Purchase Leases

As in most situations that can spin out of control, effective communication between lessee and lessor is extremely important. At start of lease, you are primarily concerned with obtaining flexible, cost effective equipment financing. The lessor’s primarily objective is to originate a profitable lease transaction. Once a payment default is in offing, primary concerns of both parties change. You now focus on taking actions to guarantee survival, while lessor seeks protection and recovery of lease investment. That being said, it is very important that you appreciate lessor’s concerns when you are planning a recovery and when communicating with lessor.

As a first step, you should notify lessor when a payment default seems unavoidable. No one wants to be blindsided by an unexplained delinquency as first indication of a problem. Most lessors will appreciate your forthright candor in alerting them. Be prepared to give an explanation of cause of payment problem, a detailed account of your company’s financial condition, and your plan to correct situation. If you are able to generate financial projections, they will prove helpful in convincing lessor to allow you to execute your recovery plan.

Try to stay in compliance with all other terms and conditions of lease. Most lessors will appreciate your diligence in adhering to other lease provisions, especially those requiring periodic financial information. Frequent updates will give lessor confidence that you are cooperating and working with him.

If appropriate, propose a rent reduction in an amount and for a term that will give you an opportunity to recover. Remember, lessor is primarily interested in how lease will be repaid and how he will realize benefit of bargain negotiated at outset of lease. Secondly, he is concerned about his collateral position. Now that a problem has surfaced, he will want protection from a loss on transaction if your company fails or if equipment repossession becomes necessary. Offer cash flow projections to show how your firm will recover and when you will be able to resume making full rent payments.