Mike Caringi, owner of a small New Jersey business that sells pumps, found himself facing a gut-wrenching dilemma last summer. Should he continue paying $ 1,500 each month for essential telecommunications services he no longer receives and for leased equipment he claims was never installed? Or, should he stop making payments and face a potential lawsuit from the firm that financed the equipment under a ‘hell or high water’ lease? Mr. Caringi’s company is one of several thousand small companies around the country reeling from the bankruptcy of Norvergence, a reseller of telecommunications and Internet services. At the core of the quagmire facing Mr. Caringi and others is that Norvergence succeeded in getting customers to sign separate lease and service contracts that provided its services.

When Norvergence abruptly shut its doors, it left thousands of its customers scrambling to replace telephone and Internet services while they were obligated to shell out over $ 200 million in lease payments to Wells Fargo Financial, CIT and 30 other leasing companies over the next five years.

How can you protect your company from being victimized in a similar situation? Certainly, most transactions involving equipment leased in connection with a related service carry some degree of risk. You can reduce that risk by taking certain precautions. First, where possible, avoid leasing equipment when the equipment is proprietary to a service. The chances are that you will be stuck with the equipment if the service provider fails. Make sure that the leased equipment has an underlying value that justifies the lease. By doing a present value calculation of all payments owed under the lease agreement and comparing that value to the fair market value of the equipment, you can see whether the lease value is reasonable.

Check to see whether the equipment is used by similar service providers, in case you need to switch services. Finally, make sure you can resell the leased equipment in the after-market, if necessary. As a last resort, you may be able to cut your losses by having the ability to buy-out the equipment from the leasing company to be resold to someone else.

Perhaps, one of the best protections against getting stuck with service-related leased equipment is to thoroughly evaluate the service provider before proceeding. Make sure the service provider is financially sound and has a long track record of providing excellent service. If possible, ask for and review financial information on the service provider. Do an Internet news search to make sure there are no troubling stories about the service provider. Be partial to services that offer equipment under contracts that tie service and use of the equipment together, such that your obligation to pay is conditioned on the service being provided.

Lastly, since these transactions always carry some risk, make sure that an abrupt interruption in the service will not have a material negative impact on your company or cause financial hardship.

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”), responsible for LTI’s marketing and financing efforts. A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.

Every year, thousands of business owners and financial managers are faced with the task of obtaining attractive financing for equipment their firms want to acquire. Snaring the best leasing arrangement requires only a bit of planning and a smidgeon of finesse. You can save time, land a better lease deal and make the leasing experience less of a conundrum by considering several important factors.

Plan Ahead

Before seeking lease proposals, invest a little time in planning and preparing. Establish priorities by considering the relative importance of such factors as lease pricing, balance sheet considerations, ongoing leasing needs and the necessity of the prospective lessor to have specialized equipment/industry knowledge. If the transaction is relatively insignificant in the overall scheme of things, a truncated planning process might be in order. If not, allow enough time to: 1) identify and pre-qualify lessors, 2) review and select a lease proposal, 3) allow selected lessor to conduct due diligence and get credit approval, and 4) to complete lease documentation.

Assemble an information package for prospective lessors that anticipates what they will want to know before submitting a proposal, including: 1) background information on your company and management bios, 2) three years of financial statements and interim financials, 3) a list of company trade and credit references, and 4) a description of the equipment to be acquired, including acquisition cost. Anticipate questions about your firm and disclose them in advance.

Choose the Right Leasing Company

The starting point for getting an attractive leasing proposal is in choosing the right leasing companies to bid. All leasing companies are not alike. Some specialize in specific industries, some in certain equipment types, and still others in transaction sizes. Leasing companies also vary in size, capabilities, expertise and integrity. Do your homework to pre-qualify leasing companies that will bid. Lessor qualities to look for include: 1) knowledge; 2) reputation; 3) ability to perform; 4) helpful business contacts; and 5) a relationship approach. Try to identify at least three leasing companies to bid.

As in any field, leasing professionals have varying degrees of knowledge and expertise. Look for leasing representatives and managements that have a good understanding of lease structuring, equipment issues, documentation, credit evaluation, the capabilities of their firms, your industry and other leasing issues. Avoid lease ‘sellers’ with obvious limited knowledge. It is too easy to be led down the painful path of misinformation and misrepresentation.

Because the entry bar for setting up shop in equipment leasing is relatively low, it is important to locate leasing companies that have good reputations in the business. Check to see whether the bidding leasing companies belong to one or more of the major industry trade associations (e.g. ELA, EAEL, UAEL, and NAELB). While membership in these associations doesn’t guarantee high ethical standards, each of these organizations has standards and processes to review members’ unethical business practices. Contact relevant associations for references. Then, get several names of customers, banks and vendors to contact.

Along with good ethics, the ability to perform as agreed is equally important in considering leasing partners. Ask for and get financial information, background information on the key managers, a listing of recently completed financings, names and contacts at key funding sources for each leasing company being considered. Review this information and follow up with the contacts provided. If your industry and/or the equipment to be leased are highly specialized, make sure the leasing companies have completed several arrangements similar to the one you are seeking. Check lessors’ websites and brochures to make sure that the type of leasing arrangement you are seeking is specifically referenced and discussed.

Good leasing partners offer more than equipment financing. In many cases, lessors have met or worked closely with bankers, attorneys, CPA firms, business insurers, equipment vendors and investors. If the leasing company serves a wide variety of customers, some of these contacts can prove invaluable. Try to get a feel for the depth and breadth of each leasing company’s ability in this area.