LEASE : Annually, thousands of business owners and financial managers are up against the job of obtaining attractive financing for equipment their firms desire to acquire. Snaring the best leasing arrangement requires only a bit of planning and a smidgeon of finesse. You are able to save time, land an improved lease deal and make the leasing experience less of a conundrum by considering several important factors. Before seeking lease proposals, invest a while in planning and preparing. Establish priorities by taking into consideration the relative importance of such factors as lease pricing, balance sheet considerations, ongoing leasing needs and the necessity of the prospective lessor to possess specialized equipment/industry knowledge. If the transaction is relatively insignificant in the entire scheme of things, a truncated planning process might take order. Or even, allow enough time for you 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) 36 months of financial statements and interim financials, 3) a listing of company trade and credit references, and 4) a description of the gear to be acquired, including acquisition cost. Anticipate questions about your firm and disclose them in advance.
Types of Lease Company
The kick off point so you can get a nice-looking 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 may bid. Lessor qualities to find include: 1) knowledge; 2) reputation; 3) ability to execute; 4) helpful business contacts; and 5) a relationship approach. Try to identify at the very least three leasing companies to bid. As in any field, leasing professionals have varying examples of knowledge and expertise. Search for leasing representatives and managements that have a good comprehension of lease structuring, equipment issues, documentation, credit evaluation, the capabilities of their firms, your industry and other leasing issues.
Avoid lease ‘sellers’with obvious limited knowledge. It’s too simple to be led down the painful path of misinformation and misrepresentation. Because the entry bar for creating shop in equipment leasing is relatively low, it is essential to discover leasing companies that have good reputations in the business. Check to see if the bidding leasing companies belong to more than one 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 review members’unethical business practices. Contact relevant associations for references. Then, get several names of customers, banks and vendors to contact.
Good Leasing Partners
In conjunction with good ethics, to be able to perform as agreed is every bit essential in considering leasing partners. Want and have financial information, background information on the key managers, a list of recently completed financings, names and contacts at key funding sources for each and every leasing company being considered. Review these records and phone the contacts provided. When your industry and/or kit to be leased are highly specialized, make sure the leasing companies have completely finished several arrangements like the one you might be seeking. Check lessors’websites and brochures to make sure that the leasing arrangement you are looking for is specifically referenced and discussed.
Good leasing partners offer in excess of equipment financing. On many occasions, lessors have met or worked closely with bankers, attorneys, CPA firms, business insurers, equipment vendors and investors. In case the leasing company serves numerous customers, many of these contacts can establish invaluable. Try to have a feel for your depth and breadth of each and every leasing company’s ability during this area. Since you’ll be working closely with the selected leasing company and might have additional leasing needs in the foreseeable future, you could start to decide on a leasing partner that values relationships? While it is tough to spot relationship-oriented leasing companies at the quoting stage, check customer references must lessor follow-up, attentiveness, willingness to learn about customers and willingness to be helpful.
Large Enough Lease Facility
Right-sizing the leasing facility can help to save many time. Seek out an arrangement that can cover equipment needs for a minimum of the following six to twelve months. A helpful general guideline is to getting a leasing facility that reaches least 20% more compared to what is needed. If your leasing personal credit line is undoubtedly an available option, it is a helpful tool in securing the correct quantity of lease financing.
Lease Term That Matches Equipment Use
The expression with the lease should match the expected utilization of the equipment as closely as possible. In case the term is way too short, the monthly cash outlays for your equipment might exceed the expected benefits to be resulting from kit (cost savings or revenue production). Should you sign a lease which is way too short that includes fair cost end-of-lease options, and exercising one of these options, you could find yourself overpaying for your equipment. In case the lease term is to much time, you could lose the flexibleness of upgrading to newer more desirable equipment. Quite a few lessees happen to be stayed with equipment they not need, yet they continue to have a tremendous lease balance remaining.
Notwithstanding your preference, a shorter lease term returns the lessor’s purchase of kit faster and lessors generally perceive a faster recovery becoming a credit enhancement. You can probably manage any mismatch between your preference as well as the lessor’s by obtaining favorable end-of-lease options. Seek end-of-lease options that come with: 1) the legal right to return kit towards the lessor; 2) favorable renewal options; and 3) favorable purchase options. Seek ways to limit what you are charged by requesting fair cost options which have been “capped” (have upper limits) or favorable fixed options.
Lease vs Rent
Obtaining lease flexibility can readily trump acquiring the lowest price. In truth, it is easy to trim a pile of cash from overall leasing costs having a flexible leasing arrangement. First, make sure the lease lets you include almost all equipment you mean to acquire. Also, check that it’ll be uncomplicated to increase the equipment to the lease as your needs change. The better leases provide for multiple schedules under a guru lease or allow you to amend existing leases to build additions. Imagin if you don’t need much of the equipment? A first termination formula is valuable in these situations. Generally, these formulas encompass present valuing the remainder of the rents. If the device has a robust residual value, try to barter a more favorable termination charge by much of the anticipated residual value.
A flexible lease arrangement anticipates upgrades. Usually, whilst equipment upgrade, the prevailing valuation on rents for this upgrade are generally and also the present valuation on the remainder of the equipment rents to create a revised schedule. Other methods may just be required when the lessor will incur penalties or additional charges resulting from how lessor has funded the lease. Are you in a position to terminate the lease early lacking any onerous charge? An amount containing the prevailing valuation on the remainder of the rents and also a termination charge no beyond 3% to 5% should compensate the lessor for early termination for most leasing arrangements. Where equipment has high residual value, request that a portion with the anticipated residual value apply to reduce early termination charges.
Does the lease have flexible end-of-lease options? Clearly, if for example the lease has a nominal purchase option, you can find little need to get more detailed end-of-lease flexibility. Otherwise, an outstanding choice of end-of-lease options is desirable. Request the ability to return the device to the lessor without undue penalty or expense, the ability to purchase the device at the fair or reduced price, and the ability to continue leasing the device at the fair or reduced rent. Consumption of ‘caps’in fair market price purchase or rental options can help prevent potential costs at lease end. Beware, however. Lessors may put into effect fair market price ‘floors'(lower limit) right after they comply with ‘caps ‘.
It may well become essential relocate the device even to another site. Make sure the lease provides that equipment are generally relocated without unreasonable penalties or charges, be more responsive to notifying the lessor. Do not forget that equipment relocation may create extra expense with the lessor, specially if it should be transferred to another state or or multiple locations. Most lessors perceive multiple locations as adding additional risk to the transaction just in case they repossess the equipment. So long as these considerations are thought about, the lessor should permit relocation of kit with reasonable notice and reimbursement of lessor’s direct costs and administrative expenses.
Could there really be an acceptable notice period in the end-of-lease that you should indicate your desire to renew the lease, purchase the device or return the device? The notice period generally ranges in one to 6 months, with three months being typical. If you should violate the notice period, the lease kicks into an automatic renewal period, usually anyone to six months. You should seek notice and automatic renewal periods that are short, to prevent unintended additional lease charges. If the lessor is unwilling to negotiate this provision, you can manage the specific situation by making sure the notice requirement is fulfilled within the allowed time.
Competitive Lease Pricing
Lease pricing is just a function of many factors, including: market rates, perceived lessee credit risk, lessor competition, equipment collateral quality and equipment re-marketing prospects. Get at least three lease bids, if possible. By the end of the afternoon, lease pricing is market driven. An adequately completed present value analysis provides into focus comparison of diverse proposals otherwise difficult to make. Make assumptions about the equipment residuals and incorporate all anticipated costs and fees. Take into consideration the amount and timing of the periodic rental payments, any advance rental payments, security deposits, cash collateral, interim rents and commitment fees. To attain a precise analysis of cash flows, you ought to incorporate any tax charges/benefits as they are to be realized.
If you are concerned about the impact of the lease transaction in your firm’s financial statements, compare the impact of every proposed lease on the balance sheet and income statement (if lease accounting isn’t your forte, get a qualified accountant involved). As an example, if your company is sensitive to adding additional debt to its balance sheet, a capital lease should oftimes be avoided. As you can see, there are numerous ways to evaluate lease proposals and to compare lease pricing. The biggest thing is to utilize an analysis method with consistency and to find the method that best fits your company’s priorities.
Understand Lease Agreement
Leasing proposals vary in the types and levels 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 contain penalty charges for late rental payments or early lease termination. These are merely a some of the possible fees and charges. It is important that you have the lease proposal and lease agreement to recognize likely charges. If fees or charges are significant and likely, you ought to incorporate them into your pricing analysis.
Most lease proposals cover the fundamental terms of the lease, but are silent regarding most of the obligations and conditions normally within the lease agreement. Lessors usually won’t negotiate the lease agreement before finding a signed proposal letter. While negotiating lease terms might not be customary or practical at the proposal stage, requesting a copy of the lessor’s standard lease combined with the proposal letter is a good idea. Inside their standard agreement, search for any onerous or non-standard terms that will otherwise get rid of the proposal from consideration.
Lessee’s Major Responsibilities and Obligations
You will find lease provisions that are common to nearly all ‘net’lease agreements, including: 1) prompt payment of rent, taxes and other required payments; 2) equipment & liability insurance; 3) equipment maintenance and upkeep; 4) tracking and reporting relocation of equipment; 5) freedom from any liens or other encumbrances against the equipment; and 6) return of equipment. Less common lease provisions, such as for example financial covenants or requiring personal guarantees might not be competitive or might lead to you rejecting a proposal that’s otherwise attractive. Review the proposal letter and the lessor’s standard lease agreement to insure they are free from provisions that are problematic. In most cases, it’s important that you have the proper to terminate the proposed transaction in the event that you and the lessor can’t arrived at terms on the lease agreement, particularly when onerous terms come in the lease that are not covered in the lease proposal.
Snaring the best lease deal and relationship need not end up like finding a root canal. With a splash of advance planning and several well defined objectives, you can find an excellent match. Remember to establish your priorities to make a decision on lease proposals and allow enough time to have the proposal, lease approval and documentation phases. Also, while lease pricing is usually of utmost concern, ensure you consider other factors that could increase costs or create problems.