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How Can I Take Advantage of Leasing and Equipment Structuring Options?

Guest post by: Stan Prokop

Article Overview: The articles provide insights into how business owners and financial managers can take advantage of lease structuring to maximize this financing alternative in capital expenditure

How Can I Take Advantage of Leasing and Equipment Structuring Options?

Many business owners and financial managers are not fully aware of different options available to them as the lessee in an equipment financing transactions. Additionally the company should also be aware that certain ' structuring options ' are in favor of the lessor or vendor, and they should be aware of some of these financing strategies used by lenders .

Let's look at some examples. Many times a company is asked two make one or two payments up front, or in advance of the lease. Borrowers should know that this enhances significantly the lenders overall yield on the transaction. Borrowers need to know this so they understand the true over all rates in the lease.

Many times a customer is asked to provide a security deposit, similar to our advanced rental scenario that we posed above. The borrower may well want to ask if any interest that accrues on the security deposit can be in his favor. At current market rates it wouldn't be a lot, but better than nothing!

Customers should also be aware that if they pay an origination fee or commitment fee to the lender that this increases their overall rate on the transaction.

One of the true advantages of leasing is the interim rent strategy. Customers can acquire and have the lessor pay for components of a system until the final system arrives and is assembled and accepted. Lessor will charge an interim rent of some form, but many times the borrower is using the equipment at least partially already. That's a clear advantage of a structured lease arrangement.

Structuring in a lease transaction usually refers to the payments themselves. Borrowers should be aware that 90% of lessors are happy to structure payments according to cash flow, seasonality, etc.

Borrowers should of course endeavor to make all lease payments on time. Leases are usually structured so that any late payments could mean an additional charge for carrying.

It is absolutely critical for customers to understand whether they are entering into an operating lease or a capital lease, sometimes called a full payout lease. If the customer is obligated to return the equipment at the end of the transaction then the customer should understand that the overall rate of the return in the transaction favors the lender. Not the borrower. Lender can sell the asset and keep all profits.

Many companies do not understand that a properly structured and negotiated lease can include insurance, maintenance, taxes, etc. This is a classic leasing convenience options, and all customers are encouraged to structure leases in this manner if it's appropriate for the asset and helps their cash flow.

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Article Tags: equipment financing, leasing, structured leases



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