According to
Equipment Leasing Association (“ELA”), U.S. businesses lease every thing from laptop computers to commercial airplanes, racking up more than $ 200 billion in equipment leased each year. Although four out of five U.S. companies use leasing to acquire equipment, many don’t know ins and outs of leasing well enough to negotiate a good deal. By focusing on a few key aspects of lease transaction, you can save a bundle on your next lease and eliminate potential aggravation.1. Choose Right Leasing Partner
The starting point for saving money on your lease is to select right leasing company. The biggest savings in this area come from saving time and dodging substandard lease transactions. The wrong lessor choice can result in a slow approval, inability of lessor to deliver, hidden fees, a poorly designed lease transaction or worst. Give this aspect of obtaining a lease your highest priority. To save a bundle on your next lease, you must do your homework in pre-qualifying bidding leasing companies. Look for lessors with: 1) experience and knowledge; 2) good reputations; 3) ability to perform; 4) helpful business contacts; and 6) a relationship approach. Ask for and get lessor financial information, background information on key managers, a listing of recently completed leases, and contacts at key funding sources for each leasing company being considered. Review this information and follow up with all contacts provided.
2. Choose Right Lease You can rake in big savings by obtaining right lease for equipment you are acquiring. When planning your lease financing, determine top three or four attributes your lease should have. During this process, carefully evaluate importance of: lease pricing, lease flexibility, balance sheet considerations, equipment obsolescence, anticipated period of equipment usage, and your firm’s credit status. The wrong lease choice can be costly.
Lease pricing is market driven, so get at least three lease bids. Carefully evaluate bids by doing a comparative analysis of discounted cash flows incorporating all anticipated costs and fees. Make sure your lease has favorable end-of-lease options, a reasonable end-of-lease notice period, ability to relocate equipment by notifying lessor, right to terminate lease early without an onerous charge, and right to assign lease to another user under agreed upon conditions. Look for an arrangement that will cover equipment needs for at least next six to twelve months.
Big savings can be realized by knowing when to select a lease with a bargain purchase option versus a fair market value option. If you know you will be keeping equipment beyond initial lease term, a bargain purchase option is usually most cost-effective alternative. If equipment is prone to obsolescence or if it is unlikely you will retain equipment at end of lease, consider a lease with fair market value, end-of-lease options.
Know your firm’s credit standing. If your firm has been in business for a number of years, is profitable, has a good track record and has a strong balance sheet, it deserves great lease pricing and terms. If your firm has a spotty credit record or weak balance sheet, challenge is to get best deal possible. Identify and offer credit enhancements that will make your transaction more attractive. Allow plenty of time to get through credit review and due diligence process.
3. Ask for Fair Market Value ‘Caps’
If you decide that a fair market value lease is way to go, you can realize big savings by limiting that value. Fair market value rental and purchase options at end of lease allow lessee to either continue leasing equipment or to buy equipment at then fair market value. These values are generally quoted by lessor at lease end based on aftermarket data, but most leases allow lessee to obtain an appraisal from a qualified equipment appraiser. To realize significant savings and to eliminate unpleasant surprises, request fair market value options that are “capped” (have upper limits). Beware, however. Lessors may insist on fair market value ‘floors’ (lower limits) when they agree to ‘caps’. The availability of a fair market value cap will depend on size of transaction (may not be available on small transactions), competition among lessors, and credit status of your firm. 4. Keep End-of-lease Notice and Renewal Periods Short
To avoid hefty unintended lease charges, seek notice and automatic renewal periods that are short. The primary purpose of end-of-lease notice period is to allow leasing company sufficient time to redeploy equipment if you elect to return equipment. The secondary purpose is to notify lessor of your plan to either continue leasing equipment or to purchase it. The notice period generally ranges from one to six months, with three months being typical. If you violate notice period, lease kicks into an often unfavorable automatic renewal period, usually one to six months. If lessor is unwilling to negotiate this provision, you can save money by making sure notice requirement is fulfilled within allowed time.
5. Slash Interim Rent
You can slash lease costs significantly by limiting interim rent. Interim rent is rent you pay for daily use of equipment between equipment acceptance and lease start dates. The rationale for interim rent is that you have use of equipment and lessor is obligated to pay equipment vendor during this period. While rationale is not unreasonable, interim rent can balloon lease pricing by arbitrarily extending term of lease (albeit by only days). The best approach is to schedule equipment delivery and acceptance toward end of month. Most lease terms officially start first day of month following equipment acceptance. Another strategy is to negotiate a truncated period at end of lease such that interim period and truncated period total one month of quoted lease term. A last strategy is to request a limit on interim rent (perhaps ten or fifteen days) regardless of equipment acceptance.
