An equipment lease form usually contains considerable risks. You should identify and minimize these risks by negotiating and adjusting essential elements.
One of the most potentially damaging risks that business owners should be aware of is the language and terms and conditions in the equipment lease form. Many businesses just sign lease agreements once they see that the rates are low. What they do not know is that the lowest rates aren’t always the most important thing to consider when it comes to leasing equipment.
Leases that are recognized as operating leases under the current U.S accounting standards always have considerable risks, which mean you have to know how the lease is structured so as to grasp exactly how risky it is. Remember that just because a lease does not qualify to be an operating lease doesn’t make it a safe bet.
Leasing companies hardly ever miss a way of structuring their leases to somehow benefit themselves. While equipment lessors have to make a profit, it should not be to your disadvantage. A lease agreement should be mutually beneficial which is why it is important to be aware of these important terms in your equipment lease form.
Terms To Consider In An Equipment Lease Form.
Interim rent is the payment you make to your lessor between the time you sign your lease agreement up to the time your lease period begins. It is important to actually understand how interim rent affects your budget. Most lease rate calculations do not take into account interim rent. If you are savvy, you can look for ways to eliminate interim rent. For example, you can negotiate with your lessor to have the interim period count as a partial payment period. They can add another partial payment period at the end of the lease so the two periods are considered as one full payment. The most important thing to consider is how your interim rent impacts your lease.
Many lease agreements have notice requirements that are impossible to meet and overly stringent. You may be required to give notice if you wish to return your equipment at the end of the lease, purchase it or upgrade it. You may also need to provide notice for repair and maintenance. These notices have to be prepared and communicated in a certain manner within a certain time frame. If you do not adhere to these rules, you can easily be penalized for non-compliance, default and even worse, undesired lease extensions.
Fair Market Value
Most equipment lease forms will have a clause that allows the lessee to purchase the equipment at fair market value at the end of the lease term. Equipment leasing companies are in the business to make profit and so they would benefit more if you extend your lease. In order to do this, they will set the fair market value of your equipment to be higher than the true market value so this will make it impractical for you to return the equipment in the event where extending the lease term is the least-costly option.
Many equipment leasing companies prefer lessees to continue leasing the equipment instead of returning it. For instance, if your lease equipment form states that compliant return means return of “all-but-not-less-than-all”, it can easily result in full lease extension charges for every piece of equipment you have not returned. Sometimes it may not be practical for lessees to return all the equipment at once so this can be very costly.
You have to be aware of the innocuous provisions regarding all the terms and conditions of your lease; failure to which you are likely to incur additional costs much to the gain of the lessor.
This is why you should always work with a professional when leasing equipment. Expert assistance is important because they can negotiate better contracts for you. Equipment leasing professionals have experience in negotiating better lease terms so they can help you minimize risks that come with leasing. They can also help you find lessors that have lower costs and risks. More importantly, they can help you with credit approval where necessary. They can also help to guide you through the necessary cost benefit analysis in light of any end of lease option decisions.
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