Returning equipment leased early is a very costly affair because leases are designed to run their full course and will usually have penalties to punish those who want to get out of them before they end.
Is it a good idea to return equipment leased early? Are there any benefits a business will enjoy from doing this? Or in the event that your circumstances are such that you have no option but to return the equipment, what would be the least costly way of doing so?
Leases Are NOT Loans
Many people have a problem differentiating between a lease and a loan. A lease is NOT a loan. In the situation of a loan paying off your debt early is a good idea and it is possible to work it out so that you save a lot of money in interest payments. Leases for equipments on the other are very different.
Leasing companies will be quick to tell you that your lease agreement cannot be canceled. Which is true because the only way you can get out of a lease is by completing all the payments early and paying the inevitable additional costs and penalties for doing so?
Although all leases should have a clause that details what you should pay if you terminate the lease early you will not save any money in this way. In fact when you do the sums for the extra costs for returning your equipment early you will find that you have to pay a lot more to return your leased machines early.
Will Returning Equipment Leased Early Make You Vulnerable To Cash Flow Problems Later?
If you have not done careful cash flow projections before making this decision chances are that you could put your business in jeopardy by making it vulnerable to some serious cash flow problems somewhere down the road. A useful question you should probably ask yourself before making a rash decision to return your leased equipment early is if the extra cash you have on hand that you want to use to pay off the lease cannot be put to better use elsewhere in your business. Chances are that it can.
Hefty Charges And Fees
The bottom line is that leases are designed to run their full length. Which means that the advantages of returning your equipment early would be minimal if any? Let’s look at some of the charges you will be liable to pay.
Some leases have a clause that charges a penalty fee of as high as 10 per cent of your remaining fees if the agreement is terminated early. Unfortunately this is not the only extra charge you will incur. You will also need to pay the following;
– The cost of packing and shipping the equipment back the location designated by the leasing company.
– You must insure the equipment for the return trip.- If there is a service contract you will need to pay a penalty for early termination of it. This penalty could be as high as 9 months payment.
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After doing your sums, the final number could be the kind of figure that would cause anybody to have a heart condition.
Purchase And Re-sell Option
Another option you would take in ending your lease prematurely would be to purchase the equipment outright and since your end game is to get rid of it, you could re-sell it. This will depend a lot on what kind of equipment we are talking about, how quickly you can find a buyer and what your costs would be in advertising and selling off the equipment.
But you will also need to consider another key factor and this is the price you will end up paying the leasing company to buy the equipment outright. When you factor in what you have already paid to the leasing company in monthly fees and other charges including taxes it is highly unlikely that you will be able to recover your money let alone make a profit from purchasing it to re-sell. The most likely thing that will happen is that you will make a huge loss on the transactions.
Your situation will only be marginally better if the terms on your contract have a $1 buyout clause. This simply means that after you have paid all the other charges you only need to add $1 and you own the equipment. This is just one of the many good reasons why it is so important to read your lease contract carefully early on and negotiate for the inclusion of such clauses before signing. Returning equipment leased early is hardly ever a good idea because it is a highly costly affair. It is the kind of thing that would have far reaching implications on your business caused by the hefty cash outlay that has to be made to make this maneuver possible.
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