Medium- and large-sized companies “lose” in the equipment leasing game every day, because they are unfamiliar with the way the game is played. Yet, equipment leasing can be the most cost-effective way to get the equipment you need to get the job done.
So how do you get what you need, without being “taken”?
1. Check out any equipment leasing company you are considering.
Because there’s a “zero cost of entry” into the equipment leasing business, it’s one where people can set themselves up easily. Sometimes, people working out of their homes masquerade as 50-person companies. So it’s important to check out the company that you want to lease from. One local leasing company in the Southern California area has over 500 complaints against it with the Better Business Bureau. The reason? This company failed to return deposits they take on deals that aren’t approved.
You can do an Internet search on the company’s name to see whether you locate any troubling news about it. Or, you can check with the local Better Business Bureau or Dun & Bradstreet to see whether there are any complaints or concerns about the company.
2. Watch out for the ABC Clause, which gives you “A”, “B” and “C” options about how to exit the lease.
Some unscrupulous lessors in the industry have abused this to the point that it has become known by insiders as the “death spiral” clause, because no matter which one you choose — you lose.
For instance, one large and well-known equipment lessor in Southern California keeps five attorneys busy defending this clause. And some of the largest companies in the area have been trying to get out of its grip.
It’s an automatic renewal clause, and here’s how it works: Option A might be automatic renewal; Option B might be going into a new lease for another piece of equipment of equal or higher value, and Option C might be agreeing to a fair market value on the piece of equipment, but the lessor sets the price.
3. Sign the lease only if it has “end-of-lease” options that are agreeable to you.
For instance, either the equipment should be returned, or it should be purchased at a fair market value or a nominal buyout fee of $1 to $100.
You can negotiate what your end-of-lease clause looks like. We have had customers who want a fair market value not to exceed 10 percent, and we will negotiate that. We have had clients who want 15 percent because they want to keep their payments lower because they have good collateral.
4. Understand the fundamentals behind the numbers.
As you are considering how a lease might be structured based on the value of the equipment, a wide variety of options are available.
For example, on computer equipment, as lessors we will not give a 30 percent buyout on computer equipment for a five-year term because we know the equipment will be worthless at the end of three years. But if it’s a five-year lease for a piece of equipment like a forklift, which has a 10-year life span, it might be possible to negotiate 30 percent to 50 percent buyout-depending on the collateral — because a forklift has another five years to go.
5. Consider the tax implications of leasing.
There are tax advantages to a properly structured lease. Since each company’s situation is different, be sure to ask your tax advisor for his/her recommendations about how to structure the lease.
6. Stay away from pre-approved credit cards for equipment leases.
These are merely marketing gimmicks, even if they come in large and impressive-looking packets of information promising you $75,000 to $100,000 worth of credit.
If you call to activate the card, you will talk with a high-income “closer” who ultimately sells you with an equipment lease at non-competitive rates.