In tough and uncertain economic times, many companies will often turn to leasing over buying to acquire the assets their growing company needs. I’d like to take this opportunity to offer a few insights on the basics of equipment financing, and enlighten you about the potential pitfalls of leasing so you can avoid them and make the smartest leasing decision possible for your growing business.
What you don’t know can cost you a pretty penny, so read on my friends...
Did you know that four out of five U.S. companies lease equipment each year, totaling more than $200 billion worth of goods? According to the Equipment Leasing Association (ELA at www.elfaonline.org), U.S. businesses lease everything from office furniture to computers and even airplanes! The sad part is that many who lease don't know the ins and outs of leasing well enough to negotiate an honest deal. By focusing on a few key aspects of the lease transaction, you can save a bundle on your next lease and eliminate problems.
Before You Get Started
A common mistake many people make is not knowing their business’s credit score or their own personal score, before beginning the leasing process.
A bad credit score can cost you big. If you don’t know your personal credit score, go to www.freecreditscore.com today before taking the next step. You can also search your firm’s credit score in some cases by going to Dunn & Bradstreet (www.dnb.com), if you have a file with them.
Bottom line: If loans are part of the mix, knowing your personal or business credit profile is a critical first step. Having a higher credit score in almost all cases can lower your financing costs and increase your chances of securing financing lease or a loan. If you have a lower credit score and/or low company rating and can afford a little time, a number of companies offer solutions to increase your score or rating before you try to obtain financing.
Choose the Right Leasing Partner for Your Needs
The starting point in saving money on any lease should always be choosing the best leasing company available that can meet your needs. By choosing the best leasing partner, you can avoid slow approvals and the potential inability of the lessor to deliver the goods you need on time, which could result in losses that can really add up. In addition, a reputable leasing agent is less like to bury hidden fees in the fine print. When looking for just the right leasing company, it’s also critical to understand that a badly designed lease transaction can really cost you big.
Here’s what you should ask/look for:
- Get a list from the lessor of recently completed leases with references that are more than six months old.
- Ask the lessor for their financial information and get background information on their key lease managers.
- Look for experience and knowledge; how long have they been in business?
- Research the Better Business Bureau www.bbb.org or Dunn & Bradstreet www.dnb.com for their ratings.
- Ask for a list of their key funding sources.
Once you have obtained all of this information, take some time to digest it and then follow up with all contacts provided by the lessor before taking the next steps.
Choose the Right Lease For Your Needs
You can reap huge cost savings by signing the right lease for the equipment you want. Because lease pricing is market-driven, I suggest you get at least four lease bids and consider the following:
- Review and compare each company’s lease flexibility
- Compare their equipment obsolescence terms
- Consider your anticipated period of equipment usage
Look for a lease that has desirable end-of-lease options, with the longest notice of end-period possible, as well as the ability to relocate equipment by notifying the lessor. Lastly, you need to examine the right to terminate the lease early without penalty or plan to negotiate the lowest penalty that you possibly can.
Additional Topics to Consider
The ‘Bargain Purchase Option’ - So long as there is an assumption that you plan to eventually purchase the leased equipment, or an upgraded version on an agreed option date, the Bargain Purchase Option allows the lessee to eventually purchase leased equipment at a price below expected fair market value. Having an upgrade option will allow you or your firm to trade in your existing leased equipment for newer, more advanced equipment during the lease term.
Also, make sure to ask for ‘Fair Market Value Caps.” This means that the rental and purchase options that are built into your agreement allow the lessee to either continue leasing the equipment or to buy the equipment at the then fair-market value at the end of the lease term.
Make sure you keep your equipment properly maintained and that your employees know you don’t own the equipment… any damage or overuse can cost you down the road in penalties from the lessor, per the terms of your agreement. Even though you might not anticipate returning the equipment you’ve leased, if you have to at the last minute and the equipment is in bad shape, the penalties can be truly costly. This is especially true if you return before the end of the term of your agreement.
In conclusion, leasing can often get you the equipment you need and, in most cases, allow your company to remain more financially solvent than it would if you had to buy outright. However, if you don’t do your homework, you can get burned. Remember, due diligence is always a good investment of your time…now get to work!