Leasing has become an increasingly popular alternative to buying equipment. In some instances, leasing enables a water quality improvement business to obtain necessary equipment with little down payment. In other cases, a lease may leave your business with a lower monthly payment than a comparable purchase.
In other situations, a lease may allow you to replace leased equipment with alternatives that prove more suitable.
In any instance, every lease involves an equipment leasing agreement. That agreement spells out the rights and obligations of both parties in the agreement.
Unfortunately, many business managers do not review lease agreements closely before signing them. Their interest centers on the firm’s need for the equipment. That need obscures concern about details.
But ignoring the details in a lease agreement can leave a lessee – the water quality improvement business leasing the equipment – at a disadvantage. So, this discussion centers on the major provisions that should concern you when entering an equipment lease agreement.
Leasing Costs. Costs remain the primary concern. So, make sure you know the monthly payment the lease requires. Also, the lease agreement should set out the total amount to be paid over the term of the lease. If either the monthly payment or total differs from your previous understanding, ask for clarification, and in the absence of that clarification, don’t sign the lease.
Flexibility. A fair lease agreement should provide the lessor with some financial flexibility. Most include a ten or fifteen day grace period beyond each payment due date. That can provide some relief if a business is in a cash bind on the scheduled due date.
Some lease agreements allow the lessee to skip occasional payments in certain circumstances. Of course, that privilege won’t come free. The leasing company will charge a fee to cover its financing costs, but that can still help with a temporary cash flow problem.
From the other perspective, some lease agreements may allow a business to step up payments or to prepay the lease in full. A business enjoying an exceptional year may find the discount for prepayment financially beneficial.
Extra Costs. Some leases have additional direct or indirect charges. For example, many call for a deposit on the equipment. Presumably the deposit remains refundable at the end of lease if the equipment is in good condition, but that should be stated in the lease agreement.
Also, look for other fees or charges; some companies include installment charges or license fees. Setting them apart from the monthly payment understates the real cost of the lease.
Service. Before signing any lease agreement, a business manager should fully understand where the responsibility for repairs and maintenance rests. That can become a more complicated matter than many realize.
To illustrate, assume you are leasing some new equipment for your water quality improvement business. A manufacturer’s guarantee usually accompanies such equipment. But you should have no doubts about who to contact in the event a breakdown occurs.
In one instance, the manufacturer may remain responsible for repairs. In another, the manufacturer may authorize a third party to handle any necessary repairs. In still another, the lessor may become responsible for repairs. Obviously, understanding who becomes responsible in a lease agreement stands as a critical concern.
Maintenance. A lease agreement also should address the responsibility for normal equipment maintenance. The agreement should specify the party responsibility – i.e., the manufacturer, the lessee, or the lessor. The agreement also should spell out any charges you must pay for maintenance.
Also, look for clauses in the lease agreement that address the problems that result from equipment down time. Down time eliminates the contribution the equipment makes to the business. So, the lease agreement should include a remedy.
The appropriate remedy naturally will vary with the circumstances. Some agreements call for the lessor to provide loaner equipment if the machinery has extended down time or must be removed for repairs.
In other instances, a lessor may provide the lessee with a rebate on the lease payment for the period the equipment remains out of service. The rebate may not fully compensate for the loss of the equipment’s availability, but a business deserves some compensation for the lost capability of the equipment.
Insurance. Insurance protection stands as another concern usually addressed in lease agreements. Again, it can be handled in a variety of ways: sometimes the lessee becomes responsible for providing protection. In other cases, the lessor obtains insurance for the machine; but the lessor may include an insurance fee in the monthly lease payments.
Again, a prospective lessee should look for flexibility. That provides the option for choosing the less expensive insurance protection.
As the final consideration, you may want the lease agreement to include provisions for replacing equipment with new or better models that become available during the term of the lease. You can expect to pay reasonable charges for exercising that option, but the charges make good business sense if equipment advances occur frequently.
Managers also should address one additional concern before entering any lease agreement. Ask the leasing company for a list of references. Chances are the list will include some familiar names in the industry, and the absence of some familiar names should raise doubts about the leasing company’s experience and capability in the industry.
In any event, check out the references. Ask enough questions to satisfy yourself concerning the leasing company’s reputation in the field:
• Does the leasing company back up its verbal commitments as well as those included in the lease agreement?
• Does the leasing company meet its service commitments promptly?
• Does the leasing company respond in a positive manner to temporary financial setbacks that might delay some scheduled lease payments?
An equipment lease represents a long-term commitment. Both the lessor and the lessee should insure that the commitment makes sense.