Most businesses are familiar with lease financing for equipment or vehicles; however, not everyone knows how to best prepare themselves for entering a lease/financing agreement. While there is no “one-size fits all” approach, we would like to share our 40 years of knowledge in suggesting important things to consider before entering a business lease or Equipment Financing Agreement (EFA).
1. Know your goals.
Knowing your goals for the new equipment/vehicles you are acquiring is essential. Are you addressing a new business opportunity? Are you replacing outdated equipment or vehicles to improve productivity? Do you want to own the equipment at the end of the lease agreement? Or, give it back and acquire updated equipment or vehicles? Knowing your goals and plans can help in structuring the ideal terms for your business needs.
2. Clearly written agreement.
The lease agreement should be clearly written and specify what happens at the end of the lease. Is there a buyout or option to purchase? If so, for how much? Can this amount be financed down to zero or does the equipment become a month to month rental? If you plan to purchase the equipment after the lease, be aware of the notice period for renewals or equipment-refresh options if applicable. In some agreements, if you do not notify the leasing company at a specific point during the lease term, you may be locked into a long renewal period. In other words, you may be stuck with equipment that is no longer useful.
The terms of disposal should be considered, particularly for vehicle fleets. Some lease financing companies offer disposal services as a standard part of the lease contract, while others use contracts that require an add-on. A lease financing company is often better connected to efficiently re-deploy or re-market the equipment than the lessee.
4. Customer service
Customer service is extremely important. A firm with friendly, knowledgeable staff, which ensures transactions go smoothly, is vital. If issues arise with the vendor providing the equipment/vehicles, a liaison who can act as your advocate can be invaluable.
Be clear on all the fees you will have to pay or that you may incur. Know all upfront fees; for example: doc fees, site inspection fees, filing fees, etc. If you wish to pay your lease off early, are there any prepayment penalties? What is the late charge policy? How long is the grace period before you are assessed a late fee? Is there a commitment fee required with submission of an application? Is it refundable?
6. Vehicle leasing.
When leasing a vehicle it is important to know the difference between “open-end” and “closed-end” and which option is best for your driving situation. The difference between a closed-end and an open-end vehicle lease comes down to who bears ultimate financial responsibility for the decline in value of the leased vehicle. In a closed-end lease, it remains with the lessor. In an open-end lease, the lessee assumes most of the responsibility. Be sure you know whether your vehicle lease has mileage restrictions and, if so, what are the penalties for exceeding the mileage. Also, you may want to have the option to purchase the vehicle at the end of the lease.
Be aware of your equipment/vehicle warranties. If you have a five-year lease term and the standard warranty is three years, then you may want to purchase an extended warranty or choose a shorter lease term. Otherwise, if there are problems with the equipment and you cannot use it, you are still responsible for making the lease payments.
If possible, try to understand the credit, approval, and funding process from the beginning. Although the process is not as long and regimented as a bank loan, there are documents that may be required during the funding decision process. A lot of time and work can go into structuring and obtaining lease financing. Understanding the lease process and knowing the documents you will need to provide can save you a lot of time and frustration.
Lease financing can be an advantageous strategy as your organization considers the acquisition of equipment and vehicles. The terms, conditions, fixed rates and pricing is often more attractive than financing offered by traditional loans. As with any agreement, a leasing agreement should be entered into with an organization that has a solid reputation. Factors to consider when choosing a lease financing partner include how long the firm has been in business, customer testimonials, credentialing of company executives from organizations such as CLP; and standings with leasing organizations such as ELFA, NEFA, and NVLA. Also, if possible, make sure your lease finance source is a direct lender as it will result in lower rates.