How to Choose an Equipment Leasing Company
CFOs and other key people involved in equipment procurement frequently get approached by commercial equipment leasing companies promising “great rates.” These salespeople will freely share their “expertise” on equipment leasing, explaining how the flexibility that their equipment leasing solution offers will reduce equipment costs and offer countless other benefits.
Other times, the equipment leasing companies are the ones getting the calls, from businesses faced with a sudden equipment need and searching for the least-expensive monthly solution. In such cases, the equipment leasing companies gladly act as “consultants.”
But it’s important for potential lessees to understand what leasing companies typically leave out of their advice—the most important drivers of risk in equipment leasing.
Enterprises can get a good deal through equipment leasing, paying only about 90% of original equipment cost, as well as getting favorable accounting treatment in the case of operating leases. But this savings depends on avoiding risk factors the equipment leasing companies don’t like to talk about, such as the financial repercussions for equipment not being returned on time or required notices not being met.
When selecting an equipment leasing company, the onus is on the lessee to evaluate the risk in each lease proposal it receives.
Plan Ahead Instead of Reacting
The foundation for selecting the best equipment leasing company is a comprehensive equipment procurement strategy. When enterprises are forced to react to sudden equipment needs, they usually don’t have the time or the allocated resources to perform full contract risk assessment and financial analyses of competing lease agreements. Therefore, leasing decisions are often driven by the lowest rate or convenience, rather than the lowest likely all-in cost.
Rate Isn’t the Full Story
When comparing equipment leasing companies, the key principle to understand is that the lease rate factor (LRF) is not the same as an interest rate. There will be other costs beyond rent embedded within any operating lease agreement, as well as within many capital lease agreements that aren’t properly structured. These costs must be included to determine the true financing cost for the equipment.
An enterprise should research and document its historical leasing costs—all costs, not just the sum of rental payments. With that information, an enterprise can conduct a lease vs. buy analysis that reflects reality, allowing accurate determinations of whether leasing is even the best option in a given situation. And if it is, that data allows for better comparisons of competing lease proposals.
Enterprises that successfully select the true lowest-cost equipment leasing companies almost always:
- Conduct full financial analysis of all lease proposals. Comparing LRFs simply isn’t enough—determining the implicit rate of a lease requires determining the likely all-in cost. This should include estimates of interim rent, other fees and deposits, extension rent, fair market value, and non-compliant return charges.
- Pay attention to contract details. To scope the likely all-in cost the many risks in lease agreements must be defined. Astute enterprises often hire equipment leasing experts to review lease proposals.
- Control the calendar. In evaluating lease proposals, enterprises serve themselves well by retaining control of the timing of each stage of the lease life cycle including vendor selection, return schedules, payment schedules, and other timing issues that have a substantial impact on whether the lessor or lessee has leverage.
- Use a mix of equipment leasing companies, equipment vendors, and banks for their leasing. Each lease vendor type can offer advantages in various situations. The best deal can often be found with an equipment leasing company—if all risk is suitably capped. But equipment vendors can offer much-needed expertise in highly specialized equipment, and relationships with banks in other areas can sometimes give an enterprise some leverage.
Selecting the best commercial equipment leasing company involves understanding the risks in lease agreements and the historical all-in cost of these risks—and then devoting sufficient time and resources into comparing lease proposals based on this knowledge.