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Read the Fine Print in Equipment Lease Contracts

Aug 18, 2007
Some business owners look over equipment leasing contracts carefully. They make notes and question obscure language. They then send the document to their lawyer for review and request that changes be made. The attorney then contacts the leasing company to negotiate the most favorable terms. How often does this chain of events occur? Very rarely.

Managers tend to skim through the contract. Most agreements are on forms, so little thinking happens and big problems occur. Nowhere is this more true than in equipment leasing.

Remember, the only time you can negotiate is up front. Once you've signed off, you're obligated.. Here are a few things to know and understand about equipment leasing.

Choose and experienced lease broker:
Make sure your broker has an adequate number of leasing companies he deals with. A broker worth his salt will pick the right one for your situation and needs.

Don't pick a lessor first:
Make them compete for your business. Once a vendor has your account, there's not much motive to negotiate.

Know What you Want:
Expand your knowledge. Know your lessor. Will upgrades and additional needs be provided? Will the lessor help with regulatory changes? What about flexibility at the end of the lease?

Know your equipment:
Will it become obsolete during the lease term? Will you need more of it? Less? Most equipment leases start with acceptance or commencement. On that date, you inspect the product and pronounce it fit for service. Then it's yours, even though the equipment is in a lessor's warehouse or in a boxcar. Your lease shouldn't begin until you're using the equipment successfully.

Make sure the equipment works:
All equipment leases include a non-negotiable "hell-or-high-water" clause that makes you pay regardless of whether equipment works. Unless you love paying for equipment that just sits there, be certain it operates when you accept it. If things are complicated put an engineer or other expert on it. Remember, once you accept, you pay every month.

Alternations and other details:
Most lessors buy equipment from manufacturers or wholesalers before they deliver it to you. Then they take your money and, perhaps a month or two later, pay on account to the manufacturer or wholesaler.

For 30 or 60 days, your lessor is free to earn interest on your cash. You can try to negotiate this if you pay attention.

Equipment leases can be short or long term. They cover goods ranging from heavy construction equipment to telephone systems and copying machines. Some questions, however, relate to leases of many different kinds of equipment.

Lessees need to know, for example, whether they can move equipment to a new location without written consent for which they may have to pay. Computers and other technology products need upgrades often. You need strong lease language if you want the lessor to pay for upgrades, adding costs to lease payments.

Much the same holds true for alterations and modifications, which leasing companies usually accept when they're easy to remove. Additions and alterations, however, may be taxable income to the lessor.

Lease Termination
Early termination probably is the most common equipment leasing problem because you can't sell goods under a lease. You're a lessee, not an owner.

Often, the termination price is the total of all payments remaining. Other approaches involve preserving the lessor's originally-anticipated yield. If you haven't done so already, this is a good time to call your accountant to help you make the best possible deal and to understand it.

Provisions for early termination, early buyout, subleasing and assignment protect lessees. They are not, however, going to be in that printed-form contract, and they're not going to be in the deal at all unless you put them there.

Other provisions protect you when the lease ends. De-installation date is a key provision. Do you dismantle equipment, crate it and ship in on your dime or the lessor's?

Don't take anything for granted. Most form leases require shipment to anywhere in the United States. Maybe you can cap that, or limit it to a specific distance such as 100 miles. If you want to keep items, can you do so and still send back part of the equipment?

Most leases state a "fair market value" at which you'll return goods to the lessor. You need to understand how that's calculated and what charges it includes. Again, this may be a good time to talk with your accountant.

Equipment leasing continues to be a significant source of financing for businesses of all sizes. To maximize its many advantages, however, you must study every detail in the contract.
About the Author
Kent Harlan has been a CPA since 1984 and is the owner of Ozarks Capital Funding, a firm offering financing in the areas of accounts receivable factoring, equipment leasing , and financing for healthcare providers .
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