Negotiating An Equipment Lease

Traps To Avoid When Negotiating An Equipment Lease (An Insider's Perspective)
By Kevin Gaither, Sales Director Business.com We all know the saying, "If a deal is too good to be true, it probably is." Having 7 years of experience in the equipment leasing business, those that negotiate equipment leases (that's YOU if you own your own company or have any financial title such as Controller, Treasurer or CFO) think this maxim should be ignored. Here's the bottom line: If you follow my tips below, you'll save your company TENS of thousands of dollars.

Here are a couple of major items to look for when negotiating an equipment lease:

1. Interim Rent
2. Litigious End of Lease Provisions
3. Unnecessary or Misapplied Deposits

Negotiate to reduce or eliminate interim rent

Interim rent is the rent that a lessor charges a lessee from the time the lessee accepts the equipment until the start of the lease. Most leases start on the first day of the month or quarter following equipment acceptance. In a lease with monthly payments, interim rent is calculated as follows: multiply the number of days between when you accept the equipment and the beginng of the lease term (i.e. 15 days or 75 days) by the monthly payment amount and divide that by 30. If you're not paying attention, interim rent can add almost a full payment to the lease. For example, your monthly payment is $3000 per month for 36 months and you accept your equipment on November 11th. How much interim rent would you pay? $3000 / 30 x 20 days = $2000. Plug THAT into your financial calculator and see what it does to your effective interest rate!
Try:  What can you do to reduce or eliminate interim rent?  You can do three things:
1.  Ask to have it removed entirely!  If you don't ask, you don't get.
2.  If you can't get it removed entirely, negotiate an interest only arrangement whereby you only pay interest (say prime rate) for the days you have the equipment in your possession but the base term has not started.  Personally, I think this is the best win-win scenario.
3.  Negotiate a cap on the amount of interim rent you'll pay (say 15 days) regardless of when the equipment is delivered and accepted.  Don't forget to re-evaluate your effective interest rate once you agree on a the amount of interim rent you'll pay.

Here's a good article titled Interim Rent:  Equipment Leasing's Trap Door.

Understand and negotiate your end of lease options

The devil IS in the details here. Don't assume anything and read your contract. You can have your attorney review the lease contract but they'll be looking for default provisions not business traps typically. When I was selling equipment leases, I encouraged lessees to have their attorney review the lease because I knew the attorney would miss the business issues that would help make me money during and at lease end.
Try:  Focus on each of the three end of lease areas:  Return, Renew, Purchase.
1.  Do you have the option to return the equipment?  Or do you have to "return and replace" your equipment, which forces you into a new lease with the same lessor?
2.  Does the lease have an auto-renew clause? If so, when do you have to notify the lessor when you DON'T want to auto renew?Watch out for 6 month notifications with 1 yr auto renewals. If you miss the deadline, the lease automatically renews at the same monthly payment for an additional year!  Talk about losing your negotiating leverage at lease end.
3.  Do you have the option to purchase the equipment at lease end?  If so, how will the price be determined?  "Fair Market Value" (FMV) is not good enough in and of itself!  Define how FMV will be determined and get it in writing before you sign.  Set a FMV cap if you can.

Two good articles for reference:  CFO.com  & Guide to Equipment Leasing End of Lease Buyout Provisions .

If you give a deposit, pay attention to how the deposit is applied

Deposits can also increase your cost and subsequent effective interest rate on your equipment lease. This should be a really easy area for you to negotiate. Lessors typically request a deposit so lessees don't continue to shop a deal after committing to a lessor.
Try:  Read the proposal letter and contract to see how the deposit will be applied.  You can see several things including the following.
1.  Deposits applied to cost.  This is the worst.  You give the lessor a deposit and they apply the deposit to the costs to initiate a lease.  Congratulations.  You just gave the lessor a chunk of change and you're not getting it back.
2.  Deposits applied to the last payment.  This is common but unnecessary in my opinion.  Your lease probably already contains provisions for the return of damaged equipment so why do they need to hold a deposit?
3.  Deposits applied to the first monthly payment.  Unless you think your contract negotiations will last for a quarter or more, this is a fair option if you have to give a deposit.

Why not ask to have the deposit requirements waived entirely?  If you're successful here, however, don't abuse the priviledge and continue to shop your lease deal with other lessors.

Here's a good article from Chooseleasing.org. 

Know the terminology

Know what they're talking about so you know how to negotiate!
Try:  Here's a good glossary of terms from Mr. Lease.com.