Insiders Guide to Snaring the Best Lease Deal
Submit Articles Back to Articles
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
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.
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.
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
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 doesnt 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
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 companys ability
in this area.
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.
Get a Large Enough Lease Facility
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
Notwithstanding your preference, a shorter lease term returns
the lessors 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 lessors 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
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
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
lessors 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 firms 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 companys priorities.
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
Understand the Lessees Major Responsibilities and
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 lessors 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 lessors standard lease agreement
to insure that they are free of provisions that are
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.
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.
About the AuthorGeorge Parker is a Director and Executive Vice President of
Leasing Technologies International, Inc.. Mr. Parker has been
involved in secured lending and equipment financing for over twenty
years. Mr. Parker is an industry leader, frequent panelist and
author of several articles pertaining to equipment financing.
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2006-07-02 18:11:12 in Business Articles