Leasing: Tips & Tricks
October 1, 2015 by JIM BARNES
Self-knowledge and familiarity with your financing options is crucial in making good decisions on equipment finance. That might sound obvious, but often it is not always the case – especially when it comes to equipment leasing.
“There’s still a big gap in knowledge,” says Lou Manitzas, team leader, OneWorld Business Finance, Austin Tex. Many people think of car leases when they think about leasing. “They don’t realize there are a lot of different ways to do a lease on equipment.”
Before you even begin to think about whether to buy, obtain a capital lease or operating lease or rent, you have to define your needs in terms of both the machine and your business finances.
FINANCE AND TAXES
Tax liability is one concern. If you want to keep assets off your books so you have more elbow room to finance other aspects of your business, an operating lease (where the lessor retains ownership of the equipment) might be the way to go. However, if you are a public company, the trend has been to put all leases on the balance sheet for transparency, according to David Powell, president and C.E.O., Canadian Finance & Leasing Association, Toronto.
Before you approach lenders, you need to be familiar with your financial statements and company history. That will give you some idea of the rate you can expect – which might not be the rate advertised on the lessor’s website.
For smaller deals, “application-only” financing may be available, where you just fill out an online application and include basic financial details, notes Manitzas. For larger transactions (usually more than $150,000), the lender may request three years of financial statements. You should also be prepared to provide two years of company tax returns and personal financial statements and tax returns on the guarantors or company owners. You will also need to provide a comparable interim statement for the most recent month-end, according to Manitzas.
The first thing to note about commercial leases is that they are not regulated. They are simply legal contracts you enter into with the lessor. “People are free to enter into whatever they want,” notes Powell. “That allows for a lot of flexibility.”
“The great thing about it is that it’s very customizable. The tough thing about it is that it’s very customizable,” says Manitzas with a laugh.
DO THE HOMEWORK
When beginning the leasing process, first check out the prospective lessor. He is researching you and you should research him, through the Web, the Better Business Bureau and any references, says Manitzas.
It’s hard to believe that this needs to be stated, but read your lease documents carefully and then hand them off to your lawyer and accountant. “Too many people sign leases and send them back without a review. This can only cause problems,” notes Manitzas. Do not assume that the proposal and the lease document are identical.
The lease document will supersede any proposal you may have received. Read the language about renewals and extensions carefully. Some leases provide for guaranteed renewals without lessee approval, notes Manitzas. Watch for language that builds in extensions; for example turning a 36-month contract into one with 36 months and a 12-month extension. That’s extra profit for the lessor.
“When you’re done with the process and funded, make sure to receive countersigned copies of all documents,” says Manitzas. “Some companies will try to sign some lease documentation but not execute critical addenda – materially changing your agreement.”
WORKING WITH THE LESSOR
As with other business relationships today, an element of collaboration is developing between lessors and lessees. In an operating lease, the lessor is most likely going to take back the equipment at the end of the lease, so he has a vested interest in understanding the technology and how it has been used in calculating residual value, notes Powell.
“You want to be clear about how you’re going to be using the machine, so there are no surprises when you return it,” says Powell. “If it’s an operating lease, you have the responsibility to maintain the equipment… [The lessor has] a good sense of what ‘normal wear and tear’ is for different kinds of machine.”
“When you go in to describe the equipment you need in the application, the lessor might actually be able to give you some good advice,” adds Powell. “They have a lot of operating information, and some ways they can almost be like a consultant.”
Even if it is a capital lease where you keep the equipment, the lessor wants to see you succeed. It’s not altruism, it’s getting repeat business. “They will make efforts to accommodate a good customer. They might be very willing to renegotiate the terms of the lease,” says Powell.
You can finance equipment through an independent leasing company like his, a bank or the manufacturer, says Manitzas.
He tips his hat to the dealers. “If you have upper-tier credit, it’s worth talking to the equipment vendor,” says Manitzas. “They can offer very low lease rates by balancing off other elements of equipment costs. There could be discounts behind the scenes,” he says. “If the goal is to get the equipment under a service contract and get new equipment every three years, then it’s probably best to go to the manufacturer. You’re always going to get the best deal that way.”
However, “If the goal is the best product at the cheapest rate, you’re probably best to go with an independent,” says Manitzas.
The industry is evolving as most are, driven by technology. Lessees and lessors becoming more like partners, says Powell. GPS and remote diagnostics can help the lessor monitor the condition and usage of the equipment, he notes. “Lease payments made on a per-day or even per hour basis seem to be a coming trend,” says Powell. Ultimately, payments will be based on usage. “We’re almost there, now.”
“Increasingly, fleet companies are offering fleet-management services,” notes Powell. Instead managing your equipment in-house, the leasing companies will offer those services, according to Powell.
Flexibility in payments based on usage is another important trend. For example, “If a big part of your business is snow-removal, then you might want to tailor a lease where your payments for certain pieces of equipment are higher in winter when you have cash flow,” says Powell.
The bottom line? Know yourself, know the lease and work with the lessor. “You would be shocked,” about some companies’ casual attitudes toward leases, says Manitzas. “Some very large companies don’t even read their lease agreements… At the end of the day, it’s a five-page document in 10 point font… Most people skim it, sign it, and send it back.”
10 QUESTIONS TO ASK
- How am I planning to use this equipment/vehicle and for how long will I need it?
- Does the lessor understand my business and the role of this transaction in it?
- What is the total lease payment, and are there any other costs I could incur before the lease ends?
- What happens if I want to change the lease or end it before the term expires?
- How am I responsible if the equipment/vehicle is damaged or destroyed?
- What are my obligations for the equipment/vehicle in terms of insurance, taxes, and maintenance during the lease term?
- Can I upgrade the equipment/vehicle or add equipment under this lease?
- What are my options at the end of the lease?
- How do I return the
- Are there any costs at the end of the lease?
Jim Barnes is contributing editor to On-Site.
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