Maintain your old Siemens Hipath system

Equipment Leasing Blunders That Can Cost Your Firm a Mint

Rod McHenry, the financial vice president of a document imaging company, thought he had great cause for celebrating. He had signed an unbelievable $370,000 lease proposal covering computer servers, workstations, software and other networking equipment. McHenry believed he had snared an incredible lease rate, capping off weeks of negotiating an acceptable equipment price with the equipment vendor. The proposal guaranteed a lease closing and offered a return of the 2% 'commitment fee' paid by McHenry's company if the leasing company failed to give credit approval within two weeks. Little did McHenry know that signing this proposal would lead his company into the 'Twilight Zone' of equipment leasing. Ultimately, his firm would fork out more than $15,000 in legal fees seeking lessor performance, only to learn that the lessor was already insolvent and mired in several similar lawsuits.

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 the Lowest Rate

One potential pot-hole facing many would-be lessees is basing their lease decision solely on the lowest monthly payment. Even on the face of it, making a decision based on the 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 the outcome of the 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 the 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 the right leasing partner, balance sheet considerations, tax considerations, choosing the 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 the area with the 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 the 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 the bidding lessors are not the subject of any unresolved problems or scandals. Most reputable lessors belong to one of the major equipment leasing trade associations (ELA, EAEL, UAEL, or NAELB). Call the 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 the Lease Agreement

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

Making the Wrong Choice Between Fair Market Value and Bargain Purchase Leases

High on the list of potential leasing blunders is choosing the wrong form of lease for your planned use of the equipment. Failure to choose wisely can result in significant additional lease expense. Equipment leases fall into two broad categories: 1) leases designed to pass ownership of the equipment to the lessee at the end of the lease (bargain purchase/capital leases) and 2) leases intended to allow the leasing company to retain ownership of the equipment (FMV or operating leases).

If you plan to keep the equipment beyond the term of the lease, it is generally cheaper to enter into a bargain purchase/capital lease. During the lease, you pay the lessor a rate of return plus the cost of the equipment. At the end of the lease, you receive the equipment title for a nominal payment. If the equipment is subject to rapid obsolescence or if you feel confident that you will return the equipment at the end of the lease, a FMV or operating lease might prove advantageous. What you are getting in a FMV or operating lease is the flexibility to kick the equipment out at lease end. Additionally, this form of lease can lower your lease rate as the lessor passes a portion of the anticipated residual value back to your firm in the form of lower payments. If your firm has reason to minimize liabilities appearing on the balance sheet, perhaps due to bank financial covenants, an operating lease might be appealing. In these lease situations, balance sheet concerns may trump the desire to obtain the lowest lease rate. In choosing a lease form, look at the period of intended equipment use, the potential for equipment obsolescence, balance sheet considerations, income tax considerations and any other factors that might influence lease choice.

Failing to Evaluate Vendor Service - Equipment Lease Arrangements

Entering into a 'hell or high water' equipment lease involving proprietary equipment required for a multi-year service (such as alternative energy or telephone services) can lead your firm into a situation ripe for blunder. Even under the best of circumstances, a 'hell or high water' equipment lease (one requiring non-cancelable payments) entered into in connection with a service arrangement carries a certain degree of risk. In many cases, the lease is provided by a leasing company independent from the service provider or later sold by the service provider to a lessor. The potential pitfall results from the possibility that your company might get stuck making lease payments for equipment it can no longer use, should the service provider fail or cease to offer the service. The best protection against this potential pitfall is to avoid these types of arrangements. If you must enter into such an arrangement, make sure the service provider is financially sound, reputable, and has a long track record of providing excellent service. Also, since these transactions always carry some risk, make sure that an abrupt interruption in the service will not have a material negative impact on your company or cause financial hardship.

Ignoring End-of-lease Notice Deadline

While not a deadly blunder, failing to give timely notice at the end of your lease can create significant additional lease expense for your firm if you plan to return the equipment. Many leases have provisions that require the lessee to notify the lessor of the lessee's decision to return the equipment at the end of the lease. If you violate the notice period, the lease kicks into an often unfavorable automatic renewal period, usually one to six months. If you intend to return the equipment at lease end, make sure your firm gives notice on time. It can save your firm a bundle in avoidable lease expense.

Underestimating Time Required to Close Lease

Not allowing enough time to go through the lease planning, proposal, approval and documentation phases can result in extra cost. A rushed process can lead to poor lessor selection, approval delays, documentation miscues or poorly negotiated lease terms. Except in small ticket transactions (under $ 75,000 to $ 100,000) where personal guarantees of the principals are involved, most lease transactions take at least three weeks or more to close. While some of the time is consumed in the bidding and credit review processes, much of it can be eaten up by administrative matters. Obtaining insurance certificates, filing UCC financing statements, reviewing and negotiating the lease agreement, all contribute to the time it takes to get to a lease closing. The best way to manage the lease closing process and to save precious time and money is to plan ahead. Make sure you establish criteria for the lease you are seeking, prepare a package containing information all bidders would want, obtain a lease closing list from each lease bidder, and respond to all requests/questions raised by bidding lessors on a timely basis.

While equipment leasing pitfalls can not always be avoided, you can take steps to prevent snags that can cost your firm a mint. Plan ahead and do your homework before launching the lease bidding process. Give high priority to selecting an experienced lease provider with high integrity and good expertise. Also, with lease transactions that represent significant obligations for your firm, engage a competent attorney to help you review and negotiate the equipment lease.

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. ("LTI"), responsible for LTI's marketing and financing efforts. A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, 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: .

In The News:

Suspect arrested over deadly mass shooting at Fourth of July parade
Tue, 05 Jul 2022 00:43:00 +0100
The man suspected of killing at least six people and seriously injuring more than 30 at a Fourth of July parade in Chicago has been arrested, police have said.

Hit, hit, hit, destroy: Russia's terrifying tactics set to ensure control of the Donbas
Mon, 04 Jul 2022 19:04:00 +0100
Russian troops are ratcheting up their efforts to secure full control of the entire Donbas area in eastern Ukraine - and from what we have witnessed, there's very little which is going to stop them right now.

Tennis star Nick Kyrgios charged with common assault
Tue, 05 Jul 2022 12:01:00 +0100
Tennis star Nick Kyrgios has been charged with assaulting his former girlfriend, media in Australia has reported.

Dozens rescued as 50,000 people face evacuation amid severe floods in Australia
Tue, 05 Jul 2022 11:18:00 +0100
Dozens of people have been rescued overnight in the Sydney area, with about 50,000 residents facing evacuation amid severe flooding in Australia.

Families need boats to leave home as deluge of floods hits Sydney
Tue, 05 Jul 2022 14:39:00 +0100
The scale of the flooding crisis unfolding around Sydney is on another level.

Erfahrungen mit Pallhuber Wein
Agen Bola SBOBET Terpercaya

Travel in comfort and at your leisure with CT Airlink Limousine & Car Service for top quality private transportation and exceptional customer service. We operate Sedans, SUVs & Vans for CT Car Services to covering all Connecticut airports including Car Service from CT to Newark Airport , Mohegan Casino Uncasville CT, Foxwoods Casino Mashantucket CT, Manhattan Cruise Terminal NYC, Brooklyn Cruise Terminal NYC and Bayonne Cruise Terminal NJ. CT Airlink hire licensed and friendly chauffeurs who have in-depth knowledge of the Areas.

How Venture Leasing Added Millions To A Startups Equity Value

Craig Berman beamed noticeably after completing his board presentation. Berman,... Read More

Ten Equipment Leasing Tips - Save a Bundle on Your Next Lease

According to the Equipment Leasing Association ("ELA"), U.S. businesses lease... Read More

Lease Contracts - The Meaning of Joint and Several

When you see the phrase "joint and several" in a... Read More

Using Equipment Leasing as a Competitive Weapon

Most great generals know how to design winning battle plans.... Read More

Pricing Your Apartments

How do you fix a price point for an apartment?... Read More

Increase Your Business Growth and Cash Flow Through Equipment Leasing

"If it can be manufactured, it can be leased." For... Read More

Leases And Tenants - The Spooky Tenant

You, Mr. Landlord are pleased to find qualified tenants for... Read More

Ten Ways to Save a Bundle on Your Next Lease

According to the Equipment Leasing Association ("ELA"), U.S. businesses lease... Read More

Warning - This Lease Might Explode Any Minute

Mike Caringi, owner of a small New Jersey business that... Read More

Venture Leasing - A Smarter Way To Build Enterprise Value

In 2003, venture capitalists and investors dispensed over $18 billion... Read More

Insiders Guide to Snaring the Best Lease Deal

Every year, thousands of business owners and financial managers are... Read More

Explore An Effective Revolutionary Approach To Traditional Business Financing

For business owners who need working capital now there is... Read More

Getting Your Venture Lease Approved

Each year venture capitalists fund more than 2,500 start-up companies... Read More

True Tenant Tales, Volume One

Working with tenants can be an amazing experience. (Owners and... Read More

Smart Car Leasing for Beginners

Car leasing is extremely popular because it provides an attractive... Read More

Dodging Leasings Grim Reaper: Navigating a Payment Default

In her third Harry Potter novel, ?The Prisoner of Azkaban?,... Read More

What Happens When the Anchor Tenant Moves and You Are On a Ten-year Lease?

Recently there was an article in the Houston Business Journal... Read More

So You Want to be a Landlord?

The residual income from owning rental properties may bring more... Read More

Interim Rent: Equipment Leasing?s Trap Door

Many lessees enter into lease transactions that they believe are... Read More

Basic Things You Should Know About A Lease Purchase Contract

What exactly is a contract?By definition, a contract is an... Read More

Landlord Tips And Tricks

Every real estate investor dealing in rental homes has done... Read More

Terms to Know Before Leasing A Vehicle - Leasing Jargon Simplified

So, you've decided that you want to lease that next... Read More

Venture Leasing: Startup Financing On the Rise

According to Pricewaterhouse Coopers, investment by institutional venture capitalists in... Read More

How To Choose An Equipment Leasing Company

Leasing has become a preferred form of equipment financing, accounting... Read More

With a Lease, The Devil Is In The Details

In the last article we looked at a few of... Read More