More and more small business’s are using leases as a way of financing the purchase of equipment, electronics and office equipment.
These leases seem to be the equivalent of a loan in that they have a fixed number of payments for a set period of time.
However, leases can be very different. Most importantly, your business does not get title to the property until the lease has ended. And the ending may not be exactly what you have pictured.
First, very few leases end cleanly after the last payment. If you want to keep the property, you may have to pay additional money. That ending amount may have been negotiated at the start (like a “$1.00 buyout”) or it may be determined at the end (like “fair market value” – whatever that is).
Second, in order to end the lease by paying additional money, you first might be required to notify the leasing company that you wish to do so. This notification may need to occur in a very specific way. For example, you might have to notify them “not less than 120 days and not more than 180 days” prior to what you believe is the end of the lease.
Try remembering that 3 or more years after you enter the lease!
Here’s the kicker… don’t expect a reminder from them. They hope you’ll forget! Why? Because many leasing companies’ contracts say that if you fail to notify them exactly as they require, then you will have automatically agreed to extend your lease by another year, and then another year, and then another year until you give proper notice. Welcome to the 36 month lease that never ends!
Unbelievably, after you have fully paid for the property (in your mind, at least) you could be required to keep paying at a high rate for obsolete equipment – or else they will come get THEIR equipment and damage your credit rating in the process.
So what should you do? Here are a few thoughts…
1) When purchasing equipment, try first to get traditional bank loan secured by the equipment. The effective interest rate will probably be much lower and there will be fewer surprises. Also, try equipment loans from lenders like American Express (higher interest – but at least they have a real end date).
2) If you must lease, read the contract carefully. Know what you are getting yourself into.
3) Note all of the critical dates on your calendar so you will be reminded that there are actions you must take to protect your rights.
4) If somehow you miss a critical date, immediately contact the lessor and find managers to talk with that have the power to bail you out of your mess – or at least settle for a little less.
Remember, leases can be packed with lots of terms and conditions. Make sure that you have your eyes open when you sign and be sure to create a system to remind you of critical dates.
Marc Bluestone
