Adrian Dalsey of Liberty Capital Group, Inc. shares his professional perspective on equipment leasing and financing.
Equipment financing and leasing is quickly becoming the ultimate, go-to form of acquiring capital for small and big businesses alike. For this reason, it is of vital importance that business owners familiarize themselves with the basics before taking on any contractual obligations. If done right, equipment financing and leasing can be an excellent tool in a business owner’s arsenal, especially for young and growing companies.
There are many reasons why a business would utilize equipment finance and lease when acquiring assets essential to their business. According to Small Business Administration, at least 80% of companies large or small in America will borrow in the form of equipment financing or leasing. Nonetheless, a significant number of small business owners are still very skeptical about exploring this effective funding option. This may, in part, be due to the lack of knowledge of how equipment finance and lease can benefit their business and is often the case that potential borrowers are uninformed or misinformed about the benefits of financing business assets. For example, most borrowers do not realize that office software, hardware, and furniture, or even company signage may be financed, depending on the strength of the business and personal credit.
One of the main reasons companies utilize equipment financing is to conserve cash. Other reasons include tax treatment, off-balance sheet management, and obsolescence avoidance. However, if your need is not aligned with the terms of the equipment financing or lease, this could potentially damage your small business cashflow. For example, if you finance or lease equipment for five years, but the job that’s required for that equipment is only for two years, the remainder term still requires payment even though that equipment is no longer generating revenue.
Options for many small businesses seeking smart, quick and convenient solutions, many times, can only be accessed through brokers. This is because many lenders only work directly with brokers.There are no direct sales to end-users, forbidding business owners direct access to quality funding sources. Conventional funding sources tend to lack flexibility when it comes to coordinating equipment transactions compared to brokers, who have a network of credible capital providers and who can facilitate equipment leases and financing with a level of speed and a wider credit window than a direct lender. For these reasons, it is more attractive working with brokers for under-served credit borrowers.
Understanding the tactics equipment leasing companies typically use for small businesses seeking financing assistance will equip prospective business owners with a basis to make sound business decisions. It is with that in mind that I will outline some fundamentals of equipment finance and lease. Before your next equipment transaction, familiarize yourself with these basics so that you can secure the best deal for your growing business:
$1 buyout – 10% buyout:
Make sure the buyout proposed by sales agents during the application process is verified and confirmed within the terms of the agreement or contract. Neglecting this fact could have dire implications since the majority of complaints brought to the BBB independent reporting agency are often centered on the end term buyout. When a leasing company does not inform a lessee regarding the penalty liabilities when it comes to an end of term buyout option can lead to an unexpected financial cash flow burden or even bankruptcy protection depending on the balloon that must be fulfilled or extend the term for an additional time without any ownership of the said assets.
In most cases, companies end up giving up on fighting for justice even when they have reasonably justifiable circumstances that warrant scrutiny if all is not in writing. Few brokers love to quote over the phone so that paper trails are avoided. It is just impossible for many to go up against companies that can afford high-priced lawyers for their defense. Leasing companies make it easy for people to acquire capital so much so that argument is one of the major pitfalls since it makes customers prone to signing lease contracts without a proper understanding of the terms.
Many Brokers adopt the “Commitment Fee” strategy to lock customers, under the guise of “taking the deal off the street.” This approach gives the brokerage industry a bad reputation and deprives the customer of the best deal at the best rate. Typically, brokers will lure customers with a low-ball quote provided to the client, and provide misleading terms without first fully qualifying the customer. When it turns out that the customer does not qualify for the rate quoted, the small business owner would have already committed themselves by way of advance payments, loan packaging fee, processing fees, and security deposit more often than not, isn’t refundable. The risk of losing the advance payment is consequently high if the letter of intent’s motive is not entirely disclosed.
Pre-approved or Pre-qualified
Terms such as “Pre-approved” or Pre-qualified” or “rate as low as” are often used as bait by unscrupulous brokers. If you understand what is required to get approval from any finance companies, you would know that there is no such thing as pre-approve or pre-qualify. Standard and best practice require lenders to conduct their due diligence through business and personal reporting agencies before providing accurate terms, not to mention the asset that you are purchasing is also part of their decision for approval, especially if it is a used asset. Make sure they supplement your approval with clear and concise terms & conditions.
Here are some other items you need to get clarity on and written confirmation for when getting into any transactions with a leasing company, whether it is a broker or direct lenders. If you review the complaints listed through Leasing News, you will see that it is a mix bags of direct lenders and brokers who receive such complaints, so working with direct lenders do not make you unsusceptible to any misleading programs.
- Approval: make sure your finance broker provides you an approval and not a quote before signing any document or providing any advance payments.
- Terms: make sure the remaining number of months after collecting advance payment is clearly stated and visible on the agreement.
- Payment Penalty: there is a difference between penalty and discount during payoff. Yes, it is true that there are no pre-payment penalties, however, understand that there is no early payoff discount, should you decide to pay your lease off early. The majority of lease contracts require the full payment of the term, whether it is paid off early or not. There may be a small discount for the early payoff; however, most leases are not cancellable, meaning you are liable for the full term whether it is amortized or not.
- Interim Rent: is a prorated payment from the delivery and funding of the equipment, which is a subsequent payment that isn’t deducted from the term. This is mostly realized after the transaction has funded and most often the date of funding are manipulated to allow them to collect interim rent as additional revenue for lenders and creates an additional expense on your end. This is in addition to the advance payment. Interim rent is calculated or prorated for the remaining month when the lease commenced. It is also the because for the most complaints from clients regarding their equipment financing transaction.
- Doc Fee: is a cost in the approval and documentation process. Lenders and brokers recoup the cost of pulling your personal & business credit reports and other cost associated with processing your financing requests. Brokerage fees, origination fees, upfront fees, and loan finder’s fees can be negotiated, but hardly possible to waive for some brokers because that is their bread and butter.
- Buyout: this is the most important part when signing the lease. The buyout MUST be provided in writing. If a dollar buyout is presented verbally, but the contract is stating an FMV (Free Market Value), this can damage your business. Be wary of the buyout, especially if it is not stated clearly in the contract, which could mean that there is a huge balloon payment at the end of your term.
- Verbal Verification: is a call conducted to confirm receipt of equipment, whether the equipment is in operation, and authorizing the release of funds and is the final step prior to the funds being released to the vendor. Don’t hesitate to ask many questions, including whether the monthly payments include sales tax, end-term buyouts, interim rents and other unexpected expenses, such as property tax, lease or a loan. You might be able to change the billing date to compensate for lower interim rent and accommodate your billing cycle.
- Insurance: in all cases, equipment financing requires you to add that equipment and the lender as additional insured to ensure they are well covered in the event of any personal or property damage that may be caused by the use and operation of that asset. Typically, like vehicles, insurance is required prior to funding. Also, ask if they will charge you if they provide gap insurance for the financed equipment.
- EFA or Equipment Finance Agreement: have the same requirements as equipment lease. EFA is a new form of equipment financing, which is not a lease, but has similar liabilities of equipment lease. EFA allows lenders to avoid collecting sales, property taxes and relief of ownership risk and liability, because, with an EFA, liabilities are transferred to the owner, not the lienholder. With leasing, the lender is the co-owner with the business owner on the leased equipment; therefore, the lender and the borrower share the same risk. Lender being a lessor or lienholder changes the risk. With an EFA, the borrower is the owner and the lender is just the lienholder.
Benefits & Advantages of Equipment Leasing and Financing
- Flexible financing solution with competitive pricing
- No age restriction used equipment
- Cashflow management
- Low initial capital outlay
- Longer term equates to a lower monthly payment
- Off-balance sheet
- 100% tax benefits
However, a good product, such as equipment finance and lease can often be is misrepresented by ill-informed brokers and deceptive sales representatives. There are instances of deception. Potential borrowers can review resources such as Leasing News’s Complaints Bulletin Board to know who the bad apples are right away before they fall into the trap. From my perspective, potential borrowers should not only learn about the type of leases available to their business, but also study and research the lenders or brokers, to make sure there are no legitimate complaints, which include but are not limited to complaints about non-refundable advance payment, lying about the buyout, over charging interim rent, and bait and switch tactics. Look for similar complaints on RipOffReport.com, ConsumerAffairs.com as well as Better Business Bureau.
If your company needs financing, and you need a faster and easier way to access much-needed resources to grow your business, it is advisable to find a broker who is committed to communicating openly and honestly with you throughout the funding process, one who is willing to educate and empower you to make an informed decision. A credible business finance brokers will be 100% transparent and help you get the most responsible commercial financing solutions so that you can run your business profitably, and not have to worry about what you just locked yourself into.