7 Terms That Affect Business Equipment Financing Performance
When leasing is used for business equipment financing, there’s the potential for cost savings, as well as some accounting and tax benefits. But the price to businesses for this potential value is the assumption of a considerable amount of risk.
Leasing to meet business equipment financing needs can be the right solution for many enterprises, but companies evaluating leasing as a business equipment financing option need to be aware of the terms and conditions that will directly affect leasing performance.
Many terms and conditions that are typical in commercial equipment leases can escalate the “all-in” equipment cost well above the sum of rental payments. Following are 7 of the most regularly used terms and conditions that add risk to lessees in commercial equipment financing:
- Interim rent. Standard lease-agreement language provided by lessors often allows the lessor to charge pro-rated daily rent—at the standard rental rate in the contract—for the time between when the lessor delivers the equipment and the time the lease officially commences. If this time period is left uncapped, the lessee is exposed.
- Notice requirements. Many lease agreements proposed by lessors include notice requirements for seemingly trivial events, such as when one laptop out of 200 being leased gets misplaced or when a minor modification is made. Such requirements are difficult and time-consuming to meet, and often lead to failure to meet notice, putting the lessee in danger of default. In addition, notice is generally required for the intent to return equipment—often in a manner or time frame that’s demanding to follow.
- Default provisions. Lessors frequently offer default conditions that make it highly likely the lessee will default. In reality, lessors rarely try to collect on default remedies—instead the threat of default gives them leverage to encourage the lessee to extend or renew leases or lease more equipment from them.
- Return conditions. The key to making leasing a successful business equipment financing strategy is being able to return the equipment on time. But lessors often include language in their lease agreements that make compliant return very difficult, such as terms that require every single piece of equipment on a schedule to be returned or else full rent continues on the entire schedule.
- Casualty terms. Casualty rates for damaged, lost, or non-returnable equipment should of course be reasonable. Lessees should also be aware of the notice requirements related to lost or damaged equipment—even small pieces of equipment. One item can trigger default if notice of a casualty event is not given. Another risk for lessees is to assume that casualty values correspond to “fair market value” as defined in the lease.
- Fair Market Value (FMV). If the buyout cost of the equipment is stipulated as FMV, but there’s ambiguous language as to how to define it—or the lessor is essentially allowed to name it—the lessor will have leverage at the end of the lease that can easily result in lease extensions or renewals that are less-than-ideal for the lessee.
- Lease Extensions. All language in a lease agreement should be analyzed for its potential to lead to lease extensions, which will quickly ruin a leasing business equipment financing plan. And lessees shouldn’t assume that because they’re paying lease extensions, they still aren’t required to return the equipment or pay a buyout to end the lease. They can’t simply say: “We’re not using it anymore; we don’t have to pay for it anymore.”
Businesses that aren’t well-versed in the terms and conditions that add risk to leasing agreements should thoroughly learn about them and/or seek professional equipment leasing expertise before making a decision to lease or negotiating leases.