How to Identify High Risk Equipment Leasing Companies
Lessor selection is crucial when entering into equipment leases, because some equipment leasing companies are substantially more high-risk than others.
When evaluating which equipment leasing companies pose the greatest risk, pay particular attention to these high-risk signs:
No in-house return processing capability.
Lessors that have to rely on third parties to accept and resell equipment make less on asset resale on returned equipment, and as a result structure lease agreements that lead to additional costs like lease extensions. Beware lessors that aren’t set up to maximize residual value who will likely be particularly aggressive in “encouraging” lease extensions.
No buy-out option at all.
Some equipment leasing companies don’t include buy-out options in their lease agreements. A lessee might think it will simply return the equipment on time, but this expectation is often not realistic and in such cases, without a buy-out option, the only recourse is costly lease extensions.
Overly stringent return requirements.
Lessors may also seek to extend leases by including lease agreement language that makes compliant return virtually impossible (e.g., must be in original packaging, including original manuals; must be inspected by manufacturer prior to return; must be packed by manufacturer).
Some lessors will include “all-but-not-less-than-all” clauses that require every item on a lease schedule to be returned or else full rent continues for the entire schedule.
Language such as this provides the lessor with end-of-lease leverage that often results in lease extensions that significantly escalate the lessee’s cost of equipment.
Uncapped interim rent.
This is a cost that is often overlooked but that can throw off lease vs. buy analysis, vendor comparisons, and equipment budget projections. Many leasing agreements allow equipment leasing companies to charge interim rent for equipment that’s been delivered and accepted— before the lease’s official commencement date. If this cost isn’t capped, it can lead to rather unpleasant surprises for lessees.
No reasonable mechanism for determining fair market value (FMV) at end of lease, or for limiting the time of FMV negotiation.
Lease agreements often include FMV buy-out options, but either fail to specify how FMV is to be determined or essentially allow the lessor to set FMV. Even if FMV must be mutually agreed upon, the lessor still has leverage because rent usually continues while the lessor and lessee negotiate FMV. Therefore, the process for reaching mutual agreement should be spelled out, ideally capped, and be limited in length so that the lessee isn’t exposed to ongoing rent.
Conclusion
Equipment leasing companies (Lessors) that are high-risk should be avoided, but it takes a keen awareness of the risks inherent in lease agreements to identify the high-risk providers.