Lease Negotiation Time
Those who survived the horrible economic times of the early 1980s remember when few could borrow money. And for those who could get credit approval, bank interest rates were between 20-25 percent.
Although borrowing costs are low today, it's difficult to get financial institutions or management to approve equipment purchases. So for many in-plants, leasing provides more opportunities.
Still, making timely payments can become a challenge. And don't imagine for a second that lessors will forget about the debt; the leasing company contract is legal. In these cases, negotiation is the key.
There are steps and guidelines you can take to avoid or lessen the impact of involving attorneys and the legal system. Although we are neither attorneys nor accountants and do not profess to give tax or legal advice, here are some ideas to consider:
- Proactive Communication: Call the leasing company if the in-plant can't make timely payments. Keep communication lines open.
- Late Payment Fees: Once payments are current, if late fees have accrued, negotiate these amounts. Be proactive and attempt to decrease the fees.
- Cram for the Exam: Re-read the lease contract before attempting a contract restructure. Understand the requirements before negotiating termination penalties, end of lease options, default provisions etc.
- Propose a Restructure: Be proactive, not reactive. Prepare a realistic workable plan.
- Be Prepared: Make sure company financial statements and cash flow projections are ready for the leasing company. Lessors will request audited financials or tax returns and a current interim statement with comparative periods for the previous year's performance.
- Be Creative: Consider decreasing monthly payments by adding months to the end of the term. Support the longer term with information regarding the equipment's useful life. Propose an alternative interest-only structure for a four- to six-month period to give your in-plant time to increase revenues to support the restructured payment.
- Find a Decision Maker: Work with a leasing company credit manager or a bank officer. The leasing company customer service representative does not have the authority to approve restructuring. Don't waste time with the wrong person.
- Other Leases: Many lease contracts contain default provisions that will place all leases with the same leasing company into default even if only one schedule is in default. The contract treats all leases as if they are in default. Default expenses multiply when all leased assets are in trouble.
- Refinance Fees: Expect fees to be assessed. Negotiate the fees.
What About Existing Leases?
Never wait until the last lease payment is made to consider end-of-lease options. Weigh and evaluate each of your options from a financial, operational, tax, accounting and revenue generation perspective.
Review all lease contracts at least nine to 12 months before the lease terminates. Leasing companies seldom proactively send in-plants early written end-of-lease notification.
Here are some end-of-lease options to consider:
- Return: When equipment is no longer needed or is obsolete, return the equipment. Replacement is optional. One-hundred percent of the equipment must be returned to the leasing company's designated location at the in-plant's expense including rigging, shipping, insurance and packing. Some leasing companies add a "restocking" fee. The fee can range from 1 percent to 10 percent of the equipment purchase price. Negotiate it.
- Renew: Renewal terms range from one month to one year. Attempt to negotiate a decreased lease renewal payment. Make renewal periods sufficient to allow time to find replacement equipment. Take the stance that the equipment is used and thus is worth less in the marketplace. Check used equipment dealers and online sources for used values.
- Automatic Renewal: Most leases automatically renew when customers fail to provide timely written end-of-lease notices. Those are called "Evergreen Leases." They're legal in 45 states. Monthly lease invoices just keep coming. This frequently happens with in-plant operations unless someone in the company is keeping close track of every lease notification deadline. The length of the automatic renewal ranges from 1 month to 1 year. New York, Rhode Island, Texas, Wisconsin and Illinois prohibit Evergreen Leases.
- Purchase: The option to purchase may be either for a bargain pre-agreed amount or for the equipment's current "fair market value." That value is not stated in the lease and is negotiable. Before negotiations begin, research the used equipment market to determine the fair market value for a similar piece of equipment.
- Trade-in for New Equipment: This choice provides the most flexible options. Financing options vary and rates are competitive. Negotiate everything in separate steps. Do not throw all options—including equipment, maintenance, supplies and financing—into one confusing negotiation. There are too many moving parts to such a negotiation and most customers leave money on the table with this process. Divide the issues and save the most.
Watch out for equipment sales people that want to refinance all company equipment along with the new equipment to "reduce payments." This seldom saves the in-plant money. It comes with the hidden risk of extended financing on old equipment that becomes obsolete during the new lease term.
Consider Used Equipment
There is a glut of new and used equipment in the market. There are risks and rewards associated with buying used equipment. Ask lots of questions.
- Why is the equipment for sale?
- What is the maintenance history?
- Is it a certified reconditioned unit? Many manufacturers put used equipment through an extensive refurbishing process prior to resale.
- Is the equipment currently operational? Go see it running.
- Are there any guarantees? Many used equipment terms of sale are "as-is-where-is" without warranties or guarantees.
One Midwestern printer acquired a disassembled press located in a warehouse in Chicago. It was offered at a bargain price—for a reason. The press never could be made operational. The company filed for bankruptcy the next year.
When financing used equipment, expect the length of the loan term to be shorter and the interest rates higher than for new equipment. There are fewer lenders and banks interested in financing used printing equipment, especially digital presses. That equipment is not known for holding its value over a long period of time. Check with your company's current bank.
New equipment usually receives 100 percent financing while banks prefer to loan 50-70 percent of the purchase price on used equipment. If lenders are unfamiliar with the collateral value, offer to help educate them. Introduce them to used equipment dealers. These experts can provide information that will help reduce lender concerns about possible financial exposure with used equipment.
Never forget the maintenance and supply part of the used equipment transaction. Service costs will be higher for used equipment and supplies.
Time to Set Sail
Although these are difficult days, options remain. That's the good news. Choices abound. Be proactive. As William Arthur Ward, author of Fountains of Faith, and an often-quoted inspirational speaker, said: "The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails."
Be a realist. Leave port. Adjust to the winds of change.
Related story: Five Lease Gotchas that Will Cost You