How would you like to have fewer hassles with your next business lease while significantly trimming costs? You can. In fact, getting better lease flexibility can easily trump getting the lowest lease rate. Here is how you can get superior lease flexibility while slashing overall leasing expense:
Lease Amount
First, make sure the lease allows you to include most of the equipment you intend to acquire. You will avoid negotiating another financing arrangement on the excluded equipment. Check that you can easily add more equipment to the lease as your needs change. The better lease arrangements provide for multiple lease schedules under a master lease or the ability to amend existing leases to make additions.
Payment Schedule
Getting a lease payment schedule that matches your company’s cash flow cycle is a big benefit in a lease arrangement. Many lessors are able to accommodate reasonable requests, subject to their own administrative constraints and their view of your company’s credit standing. Monthly and quarterly payments schedules are typical arrangements. Schedules that vary payments to accommodate cash flow seasonality are less typical, but you can negotiate such an arrangement in many cases.
Interim Rent
You can slash lease costs significantly by limiting interim rent. Interim rent is the rent you pay for daily use of equipment between the equipment acceptance and lease start dates. Interim rent can balloon lease pricing by arbitrarily extending the term of the lease (albeit by only days). The best approach is to schedule equipment delivery and acceptance toward the end of the month, to reduce the interim period. Another strategy is to negotiate a truncated period at the end of the lease such that the interim period and truncated period, together, total one monthly payment.
Upgrades
A flexible lease arrangement anticipates equipment upgrades. Usually, at the time of upgrade, the present value of rents associated with the upgrade can be combined with the present value of the remaining equipment rents to create a revised schedule.
Early Termination
Most leases do not provide for early termination. One way to achieve more flexibility is to have such a feature built into the lease. An amount consisting of the present value of the remaining rents plus a termination charge no greater than 3% to 5% should compensate the lessor for an early termination in most leasing arrangements.
End of Lease Options
Does the lease you are considering have flexible end-of-lease options? Here are several options that will make your lease more user-friendly: the right to return the equipment to the lessor without undue penalty or expense; the right to purchase the equipment at a fair or reduced price; and the right to continue leasing the equipment at a fair or reduced rent. Use of upper limits in fair market value purchase or rental options can greatly reduce potential costs at lease end. Beware, however. Lessors may insist on fair market value floors when they agree to upper limits.
Equipment Relocation
It may become necessary to relocate the equipment to another site during the lease term. Make sure the lease provides that equipment may be relocated without unreasonable penalties or charges, subject to notifying the lessor. Keep in mind that equipment relocation may create extra expense for the lessor, particularly if it is to be moved to another state or to multiple locations.
End-of-Lease Notice Period
Is there a sufficient notice period at the end-of-lease for you to indicate your desire to renew the lease, purchase the equipment or return the equipment? The notice period generally ranges from one to six months, with three months being typical. If you violate the notice period, the lease kicks into an automatic renewal period, usually one to six months. You should seek notice and automatic renewal periods that are short, to avoid unintended additional lease charges. If the lessor is unwilling to negotiate this provision, you can manage the situation by making sure the notice requirement is fulfilled within the allowed time.
Grace Periods
Lastly, look for flexibility in the grace periods associated with lease defaults. Typically, a lease will provide little or no grace period for rental payments. You can achieve greater flexibility by asking for a five to seven day grace period. Similarly, the non-payment obligations of the standard lease usually have a short grace period, typically less than ten days. You can gain superior flexibility by asking for a fifteen or twenty day grace period for these provisions.
Getting the lease flexibility that your firm deserves may require some skillful negotiating, but it is worth the effort. Be prepared for some give-and-take as you look for ways to save money and avoid future hassles. You can sign the lease that is put in front of you, or you can follow these easy tips and bring back a great lease deal.
George Parker is a co-founder, Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). A twenty-five year industry leader, George is a frequent panelist and author of several articles and e-books, including "Using Venture Leasing As A Competitive Weapon" and "101 Equipment Leasing Tips".