The popularity of equipment leasing is growing and more and more businesses are taking advantage of the economic soundness that equipment leasing offers.
As a business owner who uses or is considering equipment, you should be mindful of some of the little discussed aspects of the lease contract. Let’s examine five of the most overlooked details of an equipment lease you should be aware of before signing on the dotted line.
- Buy-Out & End of Term
There are two main types of equipment leases you will come across. The first is the nominal purchase option lease and the other is the stretch lease. The nominal purchase option lease has a specified buy-out that is executed automatically following the last payment and the lease is terminated. Typical buy-out options depend on the individual lender but range from $1 to $750.
The second lease option is the stretch lease. When the stretch lease comes to the end of the term and the purchase option is due, you are responsible to notify the leasing company of your intent to execute the purchase option. The notice should be given 60 to 90 days before reaching the purchase option date. If you fail to notify, the lease will then go into the stretch period and your monthly payments will continue on as a “rental payment”. Most lenders leave the purchase option available to you, but none of the “rental payments” will be counted towards the purchase option amount. The purchase option it typically 10% of the original pre-tax equipment cost.
It is recommended to pursue the nominal purchase option lease structure as your lease will terminate automatically and there will be no surprises come end of term. If you have been advised otherwise or have decided to choose the stretch lease option, be sure to make a journal entry to notify the lessor of your intention to exercise the purchase option when due.
- Terms of Repayment
Equipment leasing terms typically range from 18 to 72 months with the average term being 40 months. It is important to understand, that other re-payment terms may be available other than those that have been presented to you. As you evaluate your terms and payment options, you should ensure your term is well matched to your cash flow without restricting your operation. If your business is seasonal, most leasing companies offer payments that match your busier periods and lower payments when your business is in the off-season. Other terms may include three months of no payments at the beginning of the lease. This is good if the equipment is for a new offering or service as it allows you to build up a client base before you start paying for the equipment.
If you don’t see the term and payment that matches your business, it is important to ask to see what other options may be available and not just take what is presented to you. Most leasing companies are great at structuring transactions to fit the needs of their clients.
- Administration Fees
Nearly all equipment leasing companies charge a one-time administration fee at the time of the lease start. These fees can range from as little as $50 to $750 for larger transactions. Administration fees are also known as “Registration Fee”, “Processing Fee”, or “Documentation Fee”.
Be sure that the fee doesn’t seem absurd for the amount you are borrowing. As a general rule of thumb, the administration fee should never be larger than the monthly payment amount and it should only be a one-time charge. The fees are said to cover the application, documentation, and government registrations. If you feel your administration fee seems high, challenge your leasing representative to do better as most fees are negotiable.
Almost all leases need to be insured. Some leasing companies require insurance confirmation upfront to start the lease agreement and others will not require insurance to start the contract but will require it within the first 30 days.
It is recommended on all leases to provide confirmation of insurance upfront as if you fail to do so, you will automatically be enrolled in the leasing company’s insurance program at an additional monthly cost.
- Additional Fee’s & Charges
All leasing companies have additional fees that may be applicable to the lease contract. These are typically noted as a “general fee” clause in the terms and conditions of the lease contact. Some of the most common additional fees include:
- Invoicing Fee
- Non-Sufficient Funds (NSF) or Bank Return Fee
- Lease Assignment Fee
- Amortization Schedule Request
- Lien Discharge Fee
- Lease Assumption Fee
- Early Buy-Out
- Copy of Lease Contract Request
Note that some of these fees may be negotiated and many may not apply to every lease contract, but in any case, as a consumer you should be aware that they exist and by signing a lease contract, they could apply to you.
If you have any equipment leasing questions, let us know by using the form below and visit LeaseGrader.com to score any lease you are considering to ensure it is competitive and gain valuable insights.
Additional Resource: Jocova Financial