Leasing comes with plenty of risks and most of them are hardly ever appreciated by businesses as they conduct a buy vs. lease analysis. An equipment lease agreement example will give you an idea of what to expect in a real lease.
As much as equipment leasing provides a great way for companies to acquire equipment they need, it also comes with certain risks. It is appropriate for any business at any stage of development but when it comes to a start up, you may need to put your credit on the line in order to secure a lease. Equipment leasing still remains a better option to applying for a bank loan because lines of credit will remain free. You can deduct monthly lease payments as a business expense and upgrade your equipment when your lease expires.
Evaluating the risks involved in leasing helps a business to compare equipment leasing companies and also empowers it to mitigate the risks and costs through performance monitoring and contract negotiations. Going through an equipment lease example gets you familiar with some of the terms and aspects in a lease that you can and should negotiate. Remember that there is nothing like a standard business lease; everything in an equipment lease is negotiable.
What To Watch Out For In An Equipment Lease Agreement Example
An Ambiguous Definition Of Fair Market Value
Many equipment leasing companies have leases that offer lessees the opportunity to purchase equipment at the end of the lease at fair market value, return the equipment or renew the lease. In cases where returning the equipment is not logical, you can decide to extend or purchase the equipment but this is usually determined by the lease terms that your lessor uses to set the fair market value.
Even in the event where you both agree on the fair market value, your lessor is still at an advantageous position because you will still continue to pay rent as you negotiate over the fair market value.
Substitution Clause And “All-but-not-less-than-all” Clause
These clauses make compliant return nearly impossible. This is because in the lease agreement, your lessor is allowed to continue charging you full rent until you return all the equipment that you had leased. Sometimes it may not be possible for you to return all the pieces of equipment at once, so you should negotiate terms that will not put you at a disadvantage when your lessor implements the “all-but-not-less-than-all” clause.
Substitution clauses are also binding and allow you to replace equipment of greater utility and value. The substitution and the all-but-not-less-than-all clause can limit your risk as well as increase it so they should both be examined closely.
Most leasing companies require lessees to provide notice before certain events such as returning equipment, purchasing, upgrading, etc., at the end of the lease period. Some of these notices are often burdensome and may require you to provide them within a narrow time frame using certain methods of communication. If you do not follow the rules of providing notice, the result is usually additional costs or even default.
To mitigate this risk, you should always check the equipment lease agreement example for proposed lease terms that promote probability of non-compliance, and alter them.
Lease Schedules That Alter Lease Agreements
You might think that negotiating your master lease agreement helps you to cover all the bases and limit the risk but individual amendments and lease schedules can add or override terms in the lease agreement. You should monitor lease schedules or negotiate them as intently as the master lease agreement.
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Unlimited Interim Rent
Most lease agreements specify under what conditions your lease period will start. They also have provisions that allow your lessor to charge you rent for equipment provided before your lease period starts. If they have not defined this interim rent and indicated it on the contract, you are at a higher risk of additional rent payments that can completely mess up your budget and result in costly equipment programs.
If you do not have adequate knowledge about the equipment finance industry, you can easily put yourself at a great risk when negotiating your equipment lease contract. You should therefore seek the services of an equipment leasing expert who can help you avoid common mistakes when negotiating a leasing contract
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