Many organizations choose the leasing option rather than purchase capital equipment to avoid a long-term liability on their balance sheets, interest payments, and owning rapidly outdated equipment. Leasing also allows an organization to conserve cash for other uses if it considered purchasing the equipment without borrowing funds.
However, leasing demands careful review and analysis by the purchaser. Here are some guidelines and warning signs.
1. There are less-than-reputable lease companies out there that provide faulty rates and inaccurate expectations. It is important to watch out for the “come-on” that offers “equipment leasing calculators.” These calculators tend to be nothing more than an Excel sheet that provides an estimated leasing cost. The actual lease payment may be ultimately a surprise.
2. Those responsible for sourcing leasing organizations view the effort like the sourcing of any other strategic supplier. The decision to lease is a strategic one that may offer the organization advantages as noted above. However, selecting the wrong type of leasing company and the wrong type of lease will ensure negative results.
3. The purchaser needs to read the lease agreement with a magnifying glass prior to any discussion with the lease company or a final signature. This takes time, effort, and a questions list before agreement.
4. Often leasing decisions are made quickly due to organizational deadlines. However, it is important to consider the long-term effects of an equipment lease to prevent the possibility of being burdened with a no-longer-needed piece of equipment and lease payments.
5. It is important that the length of the lease is clearly stated as well as exactly what the payments will cover. Does the lease agreement cover repair and maintenance costs, shipping, and installation of the equipment?
6. Often organizations do not understand what they will need to do in order to consistently make their lease payments on time and without any instances of late or missed payments. Sometimes organizations take out a loan ensuring that no late payments are ever made while incurring another expense that may have not been considered in the leasing decision. Some industries have peak periods, and the leasing company allows the lessee to postpone payments during the low season until peak periods.
7. Those responsible for the leasing of equipment should consider every possible problem that could occur even if those issues are not noted in the lease agreement. What happens if the provider goes out of business? What about troubleshooting and support issues?
8. The buyer should be very clear what charges are not included in the lease and will be charged separately.
9. Based on the type of equipment, the company leasing the equipment should request that all support services and contact information be listed in the leasing contract. The obligations of each party should be clearly defined in the agreement.
10. The lease should detail the performance of the equipment based on the lessee’s requirements and as promised by the leasing company.
11. When leasing computer equipment, software leases are required as well. Will both equipment and software be comparable for the duration of the lease? Will equipment from various sources be compatible, and is this stated in the agreement?
12. At the end of the lease, the organization may automatically own the equipment, purchase it, or renew the lease. The end-of-lease options should be on the lease agreement. The lessee must take care to identify if the lease agreement has an automatic renewal clause.
13. Often circumstances occur in an organization that calls for the early termination of the lease. The lease agreement should note if there is a way out of the lease and all penalties that will apply.
14. The lease agreement is a contract between the lessor and the lessee. The agreement should be reviewed closely by not only the purchaser/supply professional but also a legal professional knowledgeable in all areas of leasing.
15. Often a lease requires an advance fee. The lessee should ask what that fee covers and if that fee is fully or partially refundable if the lease ends due to fraud or early termination.
16. Any organization selecting the leasing option for equipment should be wary of any short form of a leasing agreement. The shorter the contract, the more likely there will be legal issues with the leasing company.
Leasing equipment offers many benefits to that organization. But it requires time for serious review, discussion, and analysis.
Marilyn Gettinger is owner and principal of New Directions Consulting Group, which works with organizations on improving their supply chains through process streamlining and reengineering. New Directions Consulting Group offers workshops and consulting to companies from 30 employees to multinational corporations to upgrade purchasing, inventory, and supply chain processes. Gettinger, who earned her MBA from Fairleigh Dickinson University, teaches total quality management, supply chain management, and international trade at several post-secondary schools. She holds a C.P.M. and is a member of the Institute for Supply Management and the American Production and Inventory Control Society.