The more you understand about any subject, the more interesting it becomes. As you read this article you'll find that the subject of Leases-Leasing is certainly no exception.
Insiders Guide to Snaring the Best Lease Deal
Every year, thousands of business owners and financial managers are faced with the task of obtaining attractive financing for equipment their firms want to acquire. Snaring the best leasing arrangement requires only a bit of planning and a smidgeon of thoughtfulness. You can save time, land a better lease deal and make the leasing experience less of a conundrum by considering several important factors.
Plan Ahead
Before seeking lease proposals, invest a little time in planning and preparing. Establish priorities by owing to the relative importance of such factors as lease pricing, balance sheet considerations, evolvement leasing needs and the necessity of the prospective lessor to have specialized equipment / industry knowledge. If the transaction is relatively insignificant in the overall scheme of things, a truncated planning process might be in order. If not, allow enough time to: 1 ) identify
and pre - qualify lessors, 2 ) review and select a lease proposal, 3 ) allow selected lessor to conduct due diligence and get credit approval, and 4 ) to complete lease documentation.
Assemble an information package for prospective lessors that anticipates what they will want to know before submitting a proposal, including: 1 ) background information on your company and management bios, 2 ) three years of financial statements and interim financials, 3 ) a list of company bag and credit references, and 4 ) a description of the equipment to be acquired, including acquisition cost. Anticipate questions about your firm and ferret out them in advance.
Choose the Right Leasing Company
The starting limitation for getting an attractive leasing proposal is in choosing the right leasing companies to bid. All leasing companies are not alike. Some specialize in specific industries, some in certain equipment types, and still others in transaction sizes. Leasing companies also vary in size, capabilities, expertise and integrity. Do your homework to pre - qualify leasing companies that will bid. Owner qualities to look for allow for: 1 ) knowledge; 2 ) reputation; 3 ) ability to
perform; 4 ) helpful business contacts; and 5 ) a ratio approach. Try to identify at least three leasing companies to bid.
As in any field, leasing professionals have varying degrees of knowledge and expertise. Look for leasing representatives and managements that have a good understanding of lease structuring, equipment issues, documentation, conjecture evaluation, the capabilities of their firms, your industry and offbeat leasing issues. Avoid lease 'sellers' with obvious limited knowledge. It is uncommonly easy to be led isolated the painful path of misinformation and misrepresentation.
Because the entry interruption for setting up shop in equipment leasing is relatively low, it is important to locate leasing companies that have select reputations in the business. Set to see whether the bidding leasing companies belong to one or more of the major industry trade associations ( e. g. ELA, EAEL, UAEL, and NAELB ). While membership in these associations doesn't guarantee high ethical standards, each of these organizations has standards and processes to report members' low
business practices. Contact seemly associations for references. Then, strike several names of customers, banks and vendors to contact.
Along with good ethics, the ability to perform as agreed is equally important in considering leasing partners. Ask for and get financial information, wisdom information on the key managers, a indirect of recently completed financings, names and contacts at key funding sources for each leasing company being considered. Review this information and follow up with the contacts provided. If your industry and / or the equipment to be leased are highly specialized, make sure the leasing
companies have completed several arrangements companion to the one you are seeking. Okay lessors' websites and brochures to make sure that the type of leasing arrangement you are seeking is specifically referenced and discussed.
Good leasing partners overture more than equipment financing. In many cases, lessors have met or worked closely with bankers, attorneys, CPA firms, business insurers, equipment vendors and investors. If the leasing company serves a immersed variety of customers, some of these contacts can prove invaluable. Try to get a feel for the depth and breadth of each leasing company's ability in this area.
Since you will be working closely with the selected leasing company and may have additional leasing needs in the final, why not choose a leasing partner that values relationships? Although it is not easy to identify relationship - oriented leasing companies at the quoting stage, check customer references to inquire about lessor follow - up, activity, willingness to learn about customers and willingness to be helpful.
Get a Large Enough Lease Facility
Right - sizing the leasing facility can save a lot of time. Look for an arrangement that will cover equipment needs for at least the next six to twelve months. A helpful rule of thumb is to obtain a leasing facility that is at least 20 % more than what is needed. If a leasing credit career is an available option, this can be a helpful tool in securing the right amount of lease financing.
Choose a Lease Term That Matches Equipment Use
The term of the lease should match the expected use of the equipment as closely as possible. If the interval is highly short, the monthly cash outlays for the equipment might exceed the expected benefits to be derived from the equipment ( cost savings or revenue effort ). If you sign a lease that is too short that also includes fair market value end - of - lease options, and you exercise one of these options, you might wind flowering overpaying for the equipment. If the lease term is too
long, you might elude the flexibility of upgrading to newer fresh desirable equipment. Likewise than a few lessees have been stuck with equipment they no longer need, yet they slow have a significant lease balance remaining.
Notwithstanding your preference, a shorter lease term returns the lessor's investment in the equipment faster and lessors generally perceive a faster recovery to be a credit enhancement. You might be able to manage any mismatch between your preference and the lessor's by obtaining good end - of - lease options. Seek end - of - lease options that include: 1 ) the right to attainment the equipment to the lessor; 2 ) healthful renewal options; and 3 ) favorable purchase options. Seek ways
to goal what you are charged by requesting fair market value options that are " capped " ( have chief limits ) or favorable fixed options.
Look For Lease Flexibility
Obtaining lease flexibility can easily trump obtaining the lowest price. In gospel, you can trim lots of money from overall leasing costs by having a flexible leasing arrangement.
Smallest, make sure the lease allows you to include most of the equipment you intend to resolve. Also, check that it commit be easy to work in more equipment to the lease as your needs change. The better leases provide for multiple schedules under a master lease or the ability to amend existing leases to lead to additions. What if you no longer need some of the equipment? An early termination formula is useful in these situations. Generally, these formulas consist of present valuing the
remaining rents. If the equipment has a strong residual value, try to finish a more favorable eradication charge by incorporating some of the anticipated residual value.
A flexible lease arrangement anticipates upgrades. Usually, at the time of equipment upgrade, the today value of rents associated with the upgrade can be combined with the present value of the remaining equipment rents to create a revised schedule. Other methods might be required in the event that the lessor will incur penalties or additional charges resulting from the way the innkeeper has funded the lease.
Will you be able to eradicate the lease basic wandering an onerous charge? An amount consisting of the present value of the remaining rents plus a termination charge no greater than 3 % to 5 % should compensate the lessor for early termination in most leasing arrangements. Location equipment has high residual value, request that a portion of the anticipated residual value be applied to decrease early termination charges.
Does the lease have flexible end - of - lease options? Clearly, if the lease contains a nominal purchase option, there is little exigency for additional pole - of - lease licentiousness. Otherwise, a good array of end - of - lease options is desirable. Request the right to increment the equipment to the lessor without undue penalty or expense, the right to purchase the equipment at a fair or reduced price, and the right to continue leasing the equipment at a fair or reduced rent. Use of
'caps' in impartial market value purchase or rental options can greatly lessen potential costs at lease ultimate. Beware, however. Lessors may insist on fair market value 'floors' ( lower limit ) when they agree to 'caps'.
It may become necessary to relocate the equipment to another site. Make sure the lease provides that equipment can be relocated without frantic penalties or charges, subject to notifying the lessor. Keep in mind that equipment relocation may create extra expense for the lessor, particularly if it is to be moved to another state or to multiple locations. Most lessors perceive multiform locations as adding additional risk to the organization in the event they must repossess the equipment.
As long as these considerations are taken into account, the lessor should permit relocation of equipment with reasonable notice and reimbursement of lessor's direct costs and administrative expenses.
Is there a sufficient civility period at the prong - of - lease for you to try your desire to renew the lease, purchase the equipment or return the equipment? The notice period generally ranges from one to six months, with three months being informal. If you violate the notice period, the lease kicks into an automatic renewal period, usually one to six months. You should seek notice and automatic renewal periods that are short, to cut dead unintended additional lease charges. If the lessor
is unwilling to see through this provision, you can manage the situation by making sure the notice requirement is fulfilled within the allowed time.
Once you begin to move beyond basic background information, you begin to realize that there's more to Leases-Leasing than you may have first thought.
Look For Competitive Lease Pricing
Lease pricing is a function of teeming factors, including: marketplace rates, perceived lessee credit risk, innkeeper competition, equipment collateral grade and equipment re - marketing prospects. Get at least three lease bids, if possible. At the end of the day, lease pricing is market driven. A properly completed present value analysis will bring interestedness focus comparison of diverse proposals individual hard to make. Make assumptions about the equipment residuals and incorporate
all anticipated costs and fees. Take into account the amount and timing of the periodic rental payments, any advance rental payments, security deposits, cash collateral, interim rents and commitment fees. To achieve an accurate analysis of cash flows, you should incorporate any tax charges / benefits as they are to be realized.
If you are concerned about the impact of the lease transaction on your firm's financial statements, compare the impact of each proposed lease on the balance sheet and income statement ( if lease accounting is not your forte, amuse a qualified accountant involved ). For example, if your company is sensitive to adding additional debt to its balance sheet, a capital lease should probably be avoided. As you can see, there are several ways to evaluate lease proposals and to compare lease
pricing. The important thing is to use an analysis method with consistency and to choose the method that best fits your company's priorities.
Understand All Fees and Penalties
Leasing proposals vary in the types and amounts of fees and penalty charges. Some common lease charges include: commitment fees; documentation charges; charges for attorney fees; and charges for UCC financing statements. Additionally, some leases might incorporate penalty charges for late rental payments or ahead lease termination. These are only a few of the possible fees and charges. It is important that you go through the lease proposal and lease agreement to identify likely charges.
If fees or charges are significant and likely, you should incorporate them into your pricing analysis.
Understand the Lessee's Major Responsibilities and Obligations
Most lease proposals cover the basic terms of the lease, but are silent survey many of the obligations and conditions normally included in the lease agreement. Lessors usually will not negotiate the lease agreement before receiving a signed proposal letter. While negotiating lease terms might not be familiar or resultant at the proposal stage, requesting a copy of the lessor's standard lease along with the proposal letter is a good idea. In their standard agreement, look for any onerous
or non - standard terms that would otherwise eliminate the proposal from root.
There are lease provisions that are common to almost all 'net' lease agreements, including: 1 ) prompt payment of rent, taxes and other required payments; 2 ) equipment & engagement insurance; 3 ) equipment maintenance and upkeep; 4 ) tracking and reporting relocation of equipment; 5 ) freedom from any liens or disparate encumbrances against the equipment; and 6 ) accretion of equipment. Less common lease provisions, such as financial covenants or requiring personal guarantees might not
be competitive or might harvest in you gloomy a proposal that is poles apart attractive. Review the meaning letter and the lessor's standard lease agreement to insure that they are free of provisions that are problematic.
In all cases, it is earnest that you have the right to eradicate the proposed deportment if you and the lessor can not come to terms on the lease agreement, especially if onerous terms appear in the lease that are not covered in the lease proposal.
Conclusion
Snaring the best lease deal and relationship need not be like getting a root canal. With a dash of advance planning and a few well individual objectives, you can find a good match. Remember to establish your priorities in making a decision on lease proposals and allow enough stint to go through the proposal, lease approval and documentation phases. Also, while lease pricing is usually of utmost concern, manufacture sure you consider other factors that can increase costs or create problems.
George A. Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. ( " LTI " ). He is responsible for overseeing the company's marketing and financing efforts. One of the co - founders of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry commander, frequent panelist and author of several articles pertaining to equipment financing.
Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later - stage, venture capital backed companies. More information about LTI is available at http://www.ltileasing.com .
