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January 17, 2005 7:43 AM CST

Lease with Confidence

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With approximately eight out of 10 U.S. businesses using lease financing for some or all of their equipment, chances are you will be considering a lease agreement for your business, if you don't lease already. The range of equipment you can lease ? from computers and office equipment, to inventory and heavy manufacturing machinery ? and the types of leases, from short-term to longer-term, make leasing a flexible, convenient option for acquiring the equipment you need to operate and grow your business.

So what should you know when looking into lease financing? Start by identifying the lease agreement that fits your equipment and business needs. Below are 10 questions to ask before you sign on the dotted line:

1. How Will We be Using the Equipment?
Determine in what way and for how long your firm will use the equipment. This will help determine the appropriate level of investment for a lease. To help decide if leasing is a profitable financing option, perform a simple cost/benefit analysis that compares the periodic leasing payment to the revenue you expect to generate from using the equipment.

2. How Well Does the Leasing Company Representative Understand My Business?
It's more advantageous for you to work with a leasing company that understands the masonry industry. A key reason that businesses lease is for a customized option that takes individual needs and requirements into account. Whether you need to keep an eye on areas such as cash flow, budget, transaction structure or seasonal business fluctuations, your leasing company should be aware of your focus areas. For example, if you have a seasonal masonry business, you would want to negotiate flexible lease terms allowing you to forgo a lease payment without a penalty during your low season.

Your leasing company should also understand your firm's tax and cash flow requirements. Lease payments are treated as tax-deductible overhead expenses from business income, rather than as wholly owned assets that are depreciated in accordance with IRS schedules.

Residual rates ? the equipment's value at the end of the lease term ? are another key reason to work with a leasing company knowledgeable with the masonry industry. When a leasing company has the knowledge and experience to set the residual accurately, they can provide you with the best possible lease payment schedule.

3. What is the Total Lease Payment?
Get to the bottom line. Find out the total monthly payment, the number of payments, and any additional lease costs, such as insurance, taxes and other charges. This will eliminate misunderstandings or confusion over the life of the lease. Also ask if there are late payment fees or other surcharges that you could potentially incur during the lease term.

4. What Happens if the Equipment is Damaged or Destroyed?
You should know what your liability is for the equipment you are leasing. Ask whether you have to pay for lost or damaged equipment.

5. Are There Any Other Obligations For the Equipment?
Your leasing company can assume costs for the equipment's insurance, taxes and maintenance. If it does, make sure that these conditions are clearly spelled out in your lease agreement, and then review these provisions with your leasing representative. You can also determine whether you want the leasing company to handle options such as installation, maintenance, asset management and tracking, and other services.

6. What Happens if I Want to Change or End the Lease Early?
You may be subject to additional payments or charges if you want to terminate a lease earlier than the agreement states. An unexpected equipment return to a leasing company can change their portfolio mix, since they plan for assets to be part of their portfolio for a specific period of time. Ask up front what you should expect if you end your lease early or unexpectedly.

If you think your business will have additional equipment needs, you may want to consider a master lease. A master lease can accommodate changes in your equipment needs, since this type of contract lets you acquire certain additional assets under the same basic terms without negotiating a new contract. Many businesses choose the master lease option for its convenience and flexibility.

7. How Can I Upgrade or Add Equipment Under This Lease?
Unless your agreement is a master lease, more than likely you'll need to negotiate a new lease for additional equipment. Any firm anticipating future growth should negotiate an option to add equipment under original terms and conditions when structuring a lease program.

8. What Are My Options at the End of the Lease?
At the end of a lease, you can return the equipment, buy the equipment at fair market value or a nominal fixed price, or renew the lease. Once you've decided which option you want, be sure that it's specified in the lease documentation. If you choose the buy option at the end of the lease, ask when you will get the title of ownership.

9. What Are the Procedures if I Choose to Return the Equipment?
Find out whether you return the equipment to the leasing company or to another location, and what documentation and packaging materials are required for its return. Ask who pays for shipping and when the equipment needs to arrive at the return destination.

10. Will There be Any Extra Costs at the End of the Lease?
Again, you want to be as diligent as possible in accounting for any unforeseen costs. Ask if there are any other additional costs based on your account activity that you may be charged for at the end of the lease. Also, ask when such payments are due.

As in any contract agreement, the more information you have, the better position you will be in to make an informed decision. These 10 questions will help you know what to look for when you lease equipment.

You can find additional information about leasing, including a lease versus buy comparison, a glossary of terms, the types of leases available, and a directory of leasing companies, at www.chooseleasing.org.


About the Author

Michael J. Fleming, CAE, has served as President of the Equipment Leasing Association (ELA) since 1979.

 

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