What are the best ways to secure favorable terms for a capital equipment lease?

Don't enter into a capital lease. A CAPITAL LEASE is generally unfavorable to borrowers compared to a LOAN agreement. It is almost always better for a borrower to enter into a loan instead of a capital lease. This is especially true with small business loans, which are not required to comply with consumer disclosure requirements. California and New York recently added SMB disclosure requirements, but most states still lack them. As described below, there are a variety of hidden borrower costs (especially for small business borrowers) contained in most capital lease contracts.

It's important to have a good understanding of the accounting, tax and operational implications before entering into any lease. Capital leases and Operating leases have their own economic advantages when they are used for the right types of assets, and the useful life of the equipment in their operational environment matches the lease term. More importantly, it also helps when multiple stakeholders that get impacted by leases (i.e. Procurement, Finance, Accounting, Maintenance, etc.) also have input on how leases impact their respective P&L in order to ensure the maximum benefits of leases.

To secure favorable capital equipment lease terms, thorough preparation and strategic negotiation are key: Know your needs and options: Define your equipment requirements, budget constraints, and desired lease term. Research market rates and compare offers from multiple lessors. Focus on securing the lowest interest rate and down payment, a longer lease term, a favorable residual value, and flexible buyout options Build leverage: Demonstrate strong financial health and creditworthiness, offer a larger down payment, or consider shorter lease terms. Review meticulously: Scrutinize the contract for hidden fees, maintenance responsibilities, and termination clauses Monitor and manage everything continously for optimum results

The main thing to remember, about any transaction, is that any lender wants to be assured of the return of their capital. Interest rates are the profit of the lessor. Repossession of the leased item is not a ‘win’ it’s generally a loss. A game plan, including a viable alternative, is what a lessor needs to see prior to the lease of capital equipment. The lessee does not need to lease any equipment either unless the plan is solid. The best terms can be had when the path is clear. Make your path clear. Go over it and present it as such. Risk means higher rates.

Searching for the best finance deal can be stressful. So many lenders, all with different underwriting criteria and rates seemingly changing as often as their staff have their next cup of coffee. In his book, “Anyone can do it”, former Dragon’s Den investor, Duncan Bannatyne, writes “I got a particularly good deal from BNP, as a broker I’d used had told me they were desperate to get into the UK commercial market. I might have preferred not to pay a broker’s fee, but it worked out cheaper to pay for his knowledge and I’ve often found that specialist expertise can be worth the relatively small investment it requires” So, a broker can save you time and money, and often don’t even charge a fee.

Es importante revisar y leer TODAS las clausulas ya que aunque algunas parecieran repetitivas pueden tener información clave y ser la diferencia entre las opciones que se tiene

Some of the ways lenders charge borrowers more with "a capital lease" vs "a loan" include: 1) refusing to give the borrower an all-inclusive annual percentage rate (APR) interest rate, saying it only applies to a loan, not a lease; 2) collecting payments at the beginning of the month instead of at the end of the month, increasing the borrower's interest cost; 3) charging multiple advance payments or an advance "lease deposit," which increases the borrower's interest costs; 4) charging "interim rent" for a period of days or months at the outset of the repayment period, which dramatically increases the borrower's interest costs; and 5) collecting additional renewal rental payments after collecting all the initial capital lease rents.

Never consider a lease based on monthly payment alone. Additional factors to consider (especially for Fair Market Value/operating leases): Deposits - Whether they are applied to the first or last payment of the lease or as a fee). Interim Rent - Some Lessors use Quarterly Interim Rent, where they can collect up to 90 days of Interim Rent before the lease commences making the lease more expensive. End of Term - Some leases have clauses where lease may extend automatically for 3, 6, or 12 months Rate Adjustment - It's important to understand how Lessor will adjust the rate when the base rate fluctuates from signed proposal to funding. Restocking Fees - Some Lessors have restocking fees that impact the cost of a lease.

SMB borrowers who prefer "a loan" over "a capital lease" with a stated "all-inclusive APR" have a few other considerations: - Does the manufacturer of new equipment offer subsidized financing that may reduce the acquisition cost? - Is a simple interest buyout available to pay off the lease or loan early? Typically, manufacturer financing programs are more generous on prepayments (as they want to permit pre-payment to facilitate new equipment purchases), while other third-party financing sources may attempt to collect large pre-payment penalties. - If the all-inclusive APR is not disclosed, seek another financing provider who is willing to provide a loan with an APR that is disclosed in writing and that includes all fees and costs.

A great tool to help compare various lease/loan offers is a product called T-Value (I am not an employee or got paid to endorse this product). Except for hell or high-water clauses, almost every component of a lease can be negotiated. Main components to negotiate: Deposits (when they are applied to last instead of first, there more profit for the Lessor) Documentation/ Inspection Fees - Should be delineated in offer. Interim Rent - Should always be negotiated and delineated in offer. End of Term Options and Notifications - It's important to have a good understanding how and what the process will be for returning equipment. if a lease will be extended, it's important to understand if the lease will extend on a month to month basis.

Seek out independent leasing companies or bank-owned leasing entities that are members of the Equipment Finance and Leasing Association (ELFA). These organizations typically use standardized contract terms and conditions, especially in the small-ticket (<$250,000) and mid-ticket (<$5,000,000) sectors. As a lessee, be aware that you will likely enter into a UCC Article 2-A lease, which implies an absolute unconditional obligation ("come hell or high water"), regardless of performance issues, with warranties from the supplier, not the finance lessor. Caution is advised on onerous renewal clauses; month-to-month renewals are reasonable. For clarifications, consult a qualified equipment leasing lawyer. Questions? Feel free to contact me.

See the above-cited economic factors to identify in the loan or lease contracts: - documentation fees, - lien filing fees, - payments due in advance vs. arrears, - advance deposits, - interim rental payments, - notice requirements and renewal payments, and - pre-payment (early buyout) penalties. BORROWERS MAY WISH TO REQUEST THE FOLLOWING IN WRITING FROM THE LENDER: Please provide a loan agreement (not a capital lease) specifying the all-inclusive APR, and please also specify any fees or costs that may be required in addition to the monthly payments. Please confirm that the provided loan contract permits a simple interest buyout without any prepayment penalty.

Loan Agreements will have the most transparent language compared to Lease Agreements. Loans should be the best financing vehicle for long term assets. For leases, it's important that multiple stakeholders (not just legal counsel) also have a good understanding of the operational implications the legal language a lease agreement has.

If the contract is properly negotiated, and all hidden fees and potential tricks are eliminated, and if a loan document is used instead of a capital lease, there is little to manage. Management of a lease is far more complex and potentially costly for the borrower compared to a loan.

There are several online tools that Lessees can use to help them manage their leases and sometimes more importantly, the End of Term. It's important to have central repository lease contracts and assign someone the responsibility of managing lease contracts and leased assets. By ensuring a line of communication between stakeholders and continuity of responsibility to manage leases, it will improve efficiencies and help maximize the benefits of leasing.