In the age of the coronavirus, every business owner has learned how important it is to have the financial means to withstand a prolonged period of disruption. One of the ways companies tend to preserve cash is to lease equipment rather than buy it. In the construction industry, it’s often more prudent to lease when the need for specialized equipment may be required for only a short period of time on a single job or the cost of ownership is out of reach. However, businesses need to be extremely diligent with the management of those leases or they can inadvertently cost themselves a fortune.
There are two common, and costly, mistakes that businesses make with equipment leases: poor oversight of lease expirations and lack of management of lease financing costs.
When and how a lease ends is just as important as when it commences. Too many companies don’t pay attention to the fine print in these documents and penalties and charges can continue to add up—obliterating any of the cost savings the company had initially hoped to realize by leasing in the first place. There are a number of common mistakes companies make at lease end, including the following.
Leasing is designed to allow businesses to rent equipment instead of buying it. However, that convenience comes at a price and each business must fully understand what that price is before entering into a lease agreement. There are a few pitfalls companies need to watch out for, including the following.
Looking for a simple demonstration of these concepts? Consider a standard car lease. The dealer calculates the value of the car based on the anticipated usage (in this case, miles) and devaluation of the car at the end of the term. The anticipated valuation at the end of the term, together with an interest component, determines lease payments. In the construction industry, leasing heavy equipment such as excavators, haulers and loaders functions much like leasing a car. The dealer estimates the loss of value of the equipment over the life of the lease, adds an interest rate and calculates the lease payments.
When the lease expires, the dealer expects the asset to be returned on the agreed date and in the anticipated condition. Noncompliance with those terms can lead to penalties and additional fees. If an individual decides to extend the lease, the monthly payments should be recalculated based on the new (lower) value of the asset at the time of the extension. Alternatively, the lessee may opt to purchase the asset at the new, lower value or finance that purchase through a bank that offers a lower interest rate.
Through proper lease management, many of the issues described above can be avoided. Best practices for equipment lease management or management of any leased asset include the following.
1. Read the fine print. Look for hidden fees, costs, penalties and potential risks in these clauses, specifically the following.
2. Evaluate lease versus buy options. Thoroughly evaluate the lease versus buy implications and financial impact, including the following.
3. Keep tight controls. Proper management of lease agreements can mitigate risks and reduce costs.
It is never too late to negotiate, or renegotiate, lease agreements—especially when market conditions have changed. In the shadow of COVID-19, businesses are evaluating every aspect of their operations and restructuring lease agreements for assets and property to conserve cash and gain better control over their portfolios. Although the sanctity of the lease contract is paramount, current economic conditions and fear of mass bankruptcies may make lessors more amenable to renegotiating terms with lease holders. Finally, do not allow poor lease management to cause your company to pay more than necessary or incur penalties due to missed deadlines and inaction.
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