Some prudent business people carefully review a contract, and then they send the whole thing off to their lawyer, who will do the same while simultaneously analyzing the affects of punctuation marks, and sentence structure. Unfortunately, less than one in 10,000 agreements are treated in this fashion. Most agreements are on preprinted forms, so little thinking happens and big problems result. Nowhere is this more true than in equipment leasing. This article provides an overview of the equipment leasing process and what to look for when presented with an equipment lease.
Choosing the Right Equipment Lease
Equipment leases can be short- or long-term. They cover goods ranging from heavy construction equipment to basic office machines. If you are planning to lease equipment, first check with various kinds of leasing companies (e.g., such as banks, brokers, leasing specialists, and independents). Then begin negotiating the terms with several different equipment lessors simultaneously, thus forcing them to compete for your business. Then pick the lessor who best meets your needs. Do not pick the equipment lessor first and then try to negotiate a deal because the lessor knows he has your account there is little reason for him or her to negotiate.
Expand Your Knowledge
Once you have selected a few potential lessors, learn all you can about them and the equipment you are seeking to lease. As to each lessor, ask yourself the following questions:
- Will the lessor provide upgrades or additional needs?>
- Will the lessor help with regulatory changes>
- Is the lessor willing to be flexible at the end of the lease?
As to the equipment, do any and all research necessary to ensure the equipment will meet your needs for the entire term of the lease. Then be prepared to negotiate what you can and cannot do with the equipment. Ask the following questions in an affirmative manner:
- I can move the leased equipment to a new location without written consent?
- There isn’t going to be an additional payment required if I do in fact move the leased equipment?
- You will take care of necessary upgrades, right?
- If I have to take care of any upgrades, I will own them at the end of the lease term, right?
Before Your Sign the Equipment Lease, Make Sure The Equipment Works
Most equipment leases start with acceptance, or on a specified begin date. On that date, the lessee will typically be required to provide the lessor with written acceptance that the leased equipment is fit for service. As soon as you do, the equipment is yours for the term of the lease even if the equipment has yet to be inspected by you, is still in the lessor’s possession, or not even working. You, the lessee, should therefore ensure that the lease does not begin until you are using the equipment successfully. This is ultra important as most, if not all, equipment leases include a clause requiring the lessee to pay even if the equipment is not working. Unless you love paying for equipment that just sits there, be certain it operates when you accept it.
Most lessors buy equipment from manufacturers, or wholesalers, before they deliver it to the lessee. Then they take the lessee’s money and, perhaps a month or two later, pay the manufacturer or wholesaler. Why is this important? Well, for the initial 30 or 60 days, the lessor is basically earning interest on the lessee’s cash, and you can use this fact to negotiate a better rate if you bring it to their attention.
Terminating Equipment Leases
The most common equipment leasing problem is early termination. Often, the termination fee is the total of all payments remaining. Before signing an equipment lease, the lessee should have an attorney negotiate provisions for early termination, early buyout, subleasing and assignment. These clauses protect the lessee, and typically will not be present in the original preprinted-form contract provided by the lessor.
Another key provision that should be contained in the termination section of an equipment lease, is the de-installation date and the responsible party for dismantling the equipment, crating it and shipping it back to the lessor. Do not assume anything, or take anything for granted. Most preprinted form equipment leases require the lessee to ship the equipment back to the lessor anywhere in the United States. If this is the case, the lessee should try to negotiate a specific distance limit, say 100 miles.
Most equipment leases also provide for a "fair market value" at which the lessee will return goods to the lessor. The lessee must understand how that “fair market value” is calculated and what fees and/or charges it includes. Again, this may be a good time to consult with an attorney or accountant.
Read the equipment lease agreement carefully. If you are unsure about a provision, don’t assume anything. Contact a local attorney and have the lease explained before you sign on th dotted line.