It’s in the Fine Print

LEASING IS one of many financing tools available to help in-plants fill their equipment needs. Leasing allows fixed rate financing and usually is accompanied with little or low up-front costs.

Most surprises come at the end of the lease; however, some can slip in at lease commencement and show up with the first month’s invoice. By then the contracts are signed and it is too late to negotiate changes. Every lease contains complex, confusing documentation, obscure terminology and a language that can bewilder the most astute financial managers.

Capital equipment manufacturers usually provide a standard lease quote with every RFQ response. Traditionally, the leasing industry welcomes printers and their high-dollar equipment needs with open arms. A U.S. Department of Commerce study reports that 80 percent of all companies lease equipment, including Fortune 500 multi-national corporations.

Many companies decide to lease because of concerns about rapidly changing equipment technology life cycles. They lease with the goal of returning the equipment to the leasing company after it finishes its useful life cycle.

Leasing companies love solid collateral like web and sheetfed presses, cutters and bindery equipment. The equipment holds its value for years, and most customers end up buying the equipment at lease termination. Equipment that holds its value provides lenders added comfort if their customers run into financial troubles. In-plants intend to use the equipment for many years and want to own it even if the end-of lease purchase option seems excessive.

At lease termination, leasing companies do not want the equipment back. Returned equipment creates disposal and resale problems. Presses, folders and similar long-life equipment are usually financed for five to seven years.

Digital Technology Loses Value Quickly

Digital technology creates challenges for leasing companies. Equipment life cycles grow shorter, and the value of the equipment drops dramatically and rapidly—like an automobile after you drive it off the lot. Some time between the 12th and 24th month, the equipment resale price nears the zero level. Lease terms for digital print equipment and computers may be for two to four years.

Most organizations intend to return equipment to the leasing company at lease end. Because the company does not want the equipment back, leases contain language that prohibits easy returns without penalties and traps.

Manufacturers are continually introducing newer, faster equipment with features not available last year or last month. When the leasing company is in partnership with the manufacturer, the equipment sales rep tells the customer that the old lease debt, remaining payments or forced purchase option will vanish and the old debt will be forgiven.

In exchange for financial clemency, a new lease on the latest and greatest technology is waiting. Sign here, please, and financial worries will disappear. The lease term on the new digital wizard might be seven years. Now where did the old payments go? Gotcha!

So What’s New in the RFQ?

Most in-plants are highly skilled in drafting the equipment RFQ. Every desirable feature is described on the “wish list.” The financing portion of the RFQ receives little attention. The winning equipment bidder and its lease proposal go together. If Vendor A gets the equipment award, its leasing company receives the lease award, even if another leasing company had a better financing deal.

There are many types of leasing companies eager to finance equipment. They may be identified as bank-owned leasing companies or independent leasing companies. The key advantage is that they do not have a relationship with the equipment vendor, and their primary business is leasing equipment. They are in the money lending or leasing business, and that can be good.

A Finance RFQ?

We all know that competition is good for everyone. Next time new equipment is under consideration, think about creating a finance RFQ. Select three to five leasing companies to send it to. There are 750 leasing companies that are members of the Equipment Leasing and Finance Association (www.elfaonline.org) in case you want a few new resources.

When preparing a lease RFQ, invite other departments within your organization, including the tax, finance, operations and maintenance departments, to be a part of the process. The final lease contract language will contain requirements that apply to all of these departments. It is better to take a proactive stance before leasing companies dictate the deal terms.

Send it to Legal

Once the lease contract arrives, the lease review and negotiation may involve the corporate attorney, chief financial officer, purchasing and the duplication department managers. What sometimes happens is that each reviewer is unclear about his or her specific responsibility for drafting contract changes. In addition, equipment lease language is different than loan documents or real estate lease lingo.

Leases will not indicate the interest rate or total financing cost. End-of-lease options may not be easy to decipher and can be ambiguous. Surprises or Gotchas can increase the total finance cost by 10 to 20 percent of the equipment purchase price. Sometimes maintenance agreements built into the lease contract add unexpected cost add-ons too.

Every lease contains variables that affect an organization’s bottom line. Each lease contains benefits and potential pitfalls. Negotiation is the key to a good lease.

In choosing the lease that best fits, it’s good to have legal counsel or help from a lease review expert. More than one company has saved hundreds or thousands of dollars by consulting with an independent lease review expert to serve as an advocate to eliminate the business and financial Gotchas. IPG

Mary A. Redmond founded Independent Lease Review Inc. in 2002. Drawing on more than 21 years of experience as a lease sales executive for major leasing companies, her company identifies and eliminates lease Gotchas that cost clients extra money. Redmond is a professional speaker who consults, trains and writes nationally on the subjects of lease Gotchas and lease contract negotiations. Her book, “The Lease Speak Dictionary: Understand the Terms That Will Save YOU Money,” will be released in May. You may contact her at (913) 441-4108 or at: mary@reviewyourlease.com

Nine Leasing Gotchas That Can Get You

Before donning the lease reviewer’s hat, here are some areas to consider:

1) Negotiate: Begin with the assumption that everything is negotiable.

2) Equipment Price: Negotiate the equipment price separately from the lease payments. Focus on lowering the purchase price. If the purchase price is lower, the lowest lease payment follows.

3) End-of-Lease Options: Be certain you receive at least three flexible end-of-lease options:

A. Return the equipment when it no longer serves the organization’s needs—without fees, fines or penalties.

B. Renew the lease for an extended period. When the decision to buy or return the equipment is not final, it is helpful to have the option to extend the lease for a few additional months. Avoid one-year forced renewals. The best renewal option is month-to-month with reduced lease payments—after all, the equipment is now worth less.

C. Purchase options: Define the process for determining the fair market value purchase price. Negotiate the selection of the appraiser as well.

4) Avoid the Standard Lease: The “Standard Leasing Agreement” is simply the document’s title. The term “standard” never means “one size fits all.” With negotiations, it is possible to cut 5 to 15 percent off the total lease cost.

5) Reduce Upfront Costs: Negotiate to reduce documentation fees, security deposits, personal guarantee requirements and multiple advance payments.

6) Independent Lessors: The equipment vendors provide lease quotes. The vendor’s leasing company may not be the best lease source. Some equipment vendors make a bigger commission from “selling” the lease program than they do from the equipment sale.

7) Watch for Hidden Penalties: Penalties as high as 60 percent can be buried in the maze of legal language. Extra costs hide under clauses such as return provisions, restocking fees, maintenance requirements, equipment upgrades, advance notifications, acceptance deadlines, cancellation fees and automatic extensions.

8) Beware of the Perpetual Lease: Leasing companies seldom notify customers that the end of the lease is approaching. It’s a real Gotcha when managers find they are in the fifth year of a four-year lease. End-of-lease notification language is often obscure and unclear. At lease commencement, verify when you must give the leasing company written notice regarding your end-of-lease plans.

9) Notifications: Send all notices by certified mail. Never fax or e-mail your end-of-lease notice. Keep good records and receipts of all correspondence.