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Insider's Guide to Snaring
the Best Lease Deal
Every year, thousands of business owners and financial managers are faced
with the task of obtaining attractive financing for
equipment their firms want to acquire. Snaring the
best leasing arrangement requires only a bit of
planning and a smidgeon of finesse. You can save
time, land a better lease deal and make the leasing
experience less of a conundrum by considering
several important factors. Plan Ahead
Before seeking lease proposals, invest a little time
in planning and preparing. Establish priorities by
considering the relative importance of such factors
as lease pricing, balance sheet considerations,
ongoing leasing needs and the necessity of the
prospective lessor to have specialized
equipment/industry knowledge. If the transaction is
relatively insignificant in the overall scheme of
things, a truncated planning process might be in
order. If not, allow enough time 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)
three years of financial statements and interim
financials, 3) a list of company trade and credit
references, and 4) a description of the equipment to
be acquired, including acquisition cost. Anticipate
questions about your firm and disclose them in
advance.\line\line Choose the Right Leasing Company
The starting point for getting an attractive 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 will
bid. Lessor qualities to look for include: 1)
knowledge; 2) reputation; 3) ability to perform; 4)
helpful business contacts; and 5) a relationship
approach. Try to identify at least three leasing
companies to bid.\line\line As in any field, leasing
professionals have varying degrees of knowledge and
expertise. Look for leasing representatives and
managements that have a good understanding 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 is too
easy to be led down the painful path of
misinformation and misrepresentation. Because
the entry bar for setting up shop in equipment
leasing is relatively low, it is important to locate
leasing companies that have good reputations in the
business. Check to see whether the bidding leasing
companies belong to one or more 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. Along with good ethics, the ability
to perform as agreed is equally important in
considering leasing partners. Ask for and get
financial information, background information on the
key managers, a listing of recently completed
financings, names and contacts at key funding
sources for each leasing company being considered.
Review this information and follow up with the
contacts provided. If your industry and/or the
equipment to be leased are highly specialized, make
sure the leasing companies have completed several
arrangements similar to the one you are seeking.
Check lessors' websites and brochures to make sure
that the type of leasing arrangement you are seeking
is specifically referenced and discussed. Good
leasing partners offer more than equipment
financing. In many cases, lessors have met or worked
closely with bankers, attorneys, CPA firms, business
insurers, equipment vendors and investors. If the
leasing company serves a wide variety of customers,
some of these contacts can prove invaluable. Try to
get a feel for the depth and breadth of each leasing
company's ability in this area.\line\line Since you
will be working closely with the selected leasing
company and may have additional leasing needs in the
future, why not choose a leasing partner that values
relationships? Although it is not easy to identify
relationship-oriented leasing companies at the
quoting stage, check customer references to inquire
about lessor follow-up, attentiveness, willingness
to learn about customers and willingness to be
helpful.\line\line Get a Large Enough Lease
Facility\line\line Right-sizing the leasing facility
can save a lot of time. Look for an arrangement that
will cover equipment needs for at least the next six
to twelve months. A helpful rule of thumb is to
obtain a leasing facility that is at least 20% more
than what is needed. If a leasing credit line is an
available option, this can be a helpful tool in
securing the right amount of lease financing.
Choose a Lease Term That Matches Equipment Use
The term of the lease should match the expected use
of the equipment as closely as possible. If the term
is too short, the monthly cash outlays for the
equipment might exceed the expected benefits to be
derived from the equipment (cost savings or revenue
production). If you sign a lease that is too short
that also includes fair market value end-of-lease
options, and you exercise one of these options, you
might wind up overpaying for the equipment. If the
lease term is too long, you might lose the
flexibility of upgrading to newer more desirable
equipment. More than a few lessees have been stuck
with equipment they no longer need, yet they still
have a significant lease balance remaining.
Notwithstanding your preference, a shorter lease
term returns the lessor's investment in the
equipment faster and lessors generally perceive a
faster recovery to be a credit enhancement. You
might be able to manage any mismatch between your
preference and the lessor's by obtaining favorable
end-of-lease options. Seek end-of-lease options that
include: 1) the right to return the equipment to the
lessor; 2) favorable renewal options; and 3)
favorable purchase options. Seek ways to limit what
you are charged by requesting fair market value
options that are "capped" (have upper limits) or
favorable fixed options. Look For Lease
Flexibility\line\line Obtaining lease flexibility
can easily trump obtaining the lowest price. In
fact, you can trim lots of money from overall
leasing costs by having a flexible leasing
arrangement. First, make sure the lease allows
you to include most of the equipment you intend to
acquire. Also, check that it will be easy to add
more equipment to the lease as your needs change.
The better leases provide for multiple schedules
under a master lease or the ability to amend
existing leases to make additions. What if you no
longer need some of the equipment? An early
termination formula is useful in these situations.
Generally, these formulas consist of present valuing
the remaining rents. If the equipment has a strong
residual value, try to negotiate a more favorable
termination charge by incorporating some of the
anticipated residual value. A flexible lease
arrangement anticipates upgrades. Usually, at the
time of equipment upgrade, the present value of
rents associated with the upgrade can be combined
with the present value of the remaining equipment
rents to create a revised schedule. Other methods
might be required in the event that the lessor will
incur penalties or additional charges resulting from
the way the lessor has funded the lease. Will
you be able to terminate the lease early without an
onerous charge? An amount consisting of the present
value of the remaining rents plus a termination
charge no greater than 3% to 5% should compensate
the lessor for early termination in most leasing
arrangements. Where equipment has high residual
value, request that a portion of the anticipated
residual value be applied to reduce early
termination charges. Does the lease have
flexible end-of-lease options? Clearly, if the lease
contains a nominal purchase option, there is little
need for additional end-of-lease flexibility.
Otherwise, a good array of end-of-lease options is
desirable. Request the right to return the equipment
to the lessor without undue penalty or expense, the
right to purchase the equipment at a fair or reduced
price, and the right to continue leasing the
equipment at a fair or reduced rent. Use of "caps"
in fair market value purchase or rental options can
greatly reduce potential costs at lease end. Beware,
however. Lessors may insist on fair market value
"floors" (lower limit) when they agree to "caps" .
It may become necessary to relocate the equipment to
another site. Make sure the lease provides that
equipment can be relocated without unreasonable
penalties or charges, subject to notifying the
lessor. Keep in mind that equipment relocation may
create extra expense for the lessor, particularly if
it is to be moved to another state or to multiple
locations. Most lessors perceive multiple locations
as adding additional risk to the transaction in the
event they must repossess the equipment. As long as
these considerations are taken into account, the
lessor should permit relocation of equipment with
reasonable notice and reimbursement of lessor's
direct costs and administrative expenses. Is
there a sufficient notice period at the end-of-lease
for you to indicate your desire to renew the lease,
purchase the equipment or return the equipment? The
notice period generally ranges from one to six
months, with three months being typical. If you
violate the notice period, the lease kicks into an
automatic renewal period, usually one to six months.
You should seek notice and automatic renewal periods
that are short, to avoid unintended additional lease
charges. If the lessor is unwilling to negotiate
this provision, you can manage the situation by
making sure the notice requirement is fulfilled
within the allowed time. Look For Competitive Lease
Pricing Lease pricing is 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. At the end of the day, lease pricing is
market driven. A properly completed present value
analysis will bring 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 account the amount and timing of the periodic
rental payments, any advance rental payments,
security deposits, cash collateral, interim rents
and commitment fees. To achieve an accurate analysis
of cash flows, you should incorporate any tax
charges/benefits as they are to be realized.
If you are concerned about the impact of the lease
transaction on your firm's financial statements,
compare the impact of each proposed lease on the
balance sheet and income statement (if lease
accounting is not your forte, get a qualified
accountant involved). For example, if your company
is sensitive to adding additional debt to its
balance sheet, a capital lease should probably be
avoided. As you can see, there are several ways to
evaluate lease proposals and to compare lease
pricing. The important thing is to use an analysis
method with consistency and to choose the method
that best fits your company's priorities.\line\line
Understand All Fees and Penalties Leasing
proposals vary in the types and amounts 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 only a few of the
possible fees and charges. It is important that you
go through the lease proposal and lease agreement to
identify likely charges. If fees or charges are
significant and likely, you should incorporate them
into your pricing analysis. Understand the Lessee's
Major Responsibilities and Obligations Most
lease proposals cover the basic terms of the lease,
but are silent regarding many of the obligations and
conditions normally included in the lease agreement.
Lessors usually will not negotiate the lease
agreement before receiving 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 along with the
proposal letter is a good idea. In their standard
agreement, look for any onerous or non-standard
terms that would otherwise eliminate the proposal
from consideration. There are lease provisions
that are common to almost 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
financial covenants or requiring personal guarantees
might not be competitive or might result in you
rejecting a proposal that is otherwise attractive.
Review the proposal letter and the lessor's standard
lease agreement to insure that they are free of
provisions that are problematic. In all cases,
it is important that you have the right to terminate
the proposed transaction if you and the lessor can
not come to terms on the lease agreement, especially
if onerous terms appear in the lease that are not
covered in the lease proposal. Conclusion
Snaring the best lease deal and relationship need
not be like getting a root canal. With a dash of
advance planning and a few well defined objectives,
you can find a good match. Remember to establish
your priorities in making a decision on lease
proposals and allow enough time to go through the
proposal, lease approval and documentation phases.
Also, while lease pricing is usually of utmost
concern, make sure you consider other factors that
can increase costs or create problems.
This article is the property of
www.greatestautoloan.com, which has been
offering Auto Loan services since 2005. To find
out more visit
www.greatestautoloan.com
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