Understanding the terms of a lease agreement

December 17, 2015

Leasing is becoming an increasingly attractive way for corporations and government agencies to retain the latest assets and equipment, without the hassles of actually owning them. The latest Alleasing Equipment Demand Index shows that equipment finance is by far the most commonly thought-of method for funding new asset acquisitions.

The survey, conducted in September 2015, shows that an average 30.5 per cent of asset acquisitions will be secured through an operating lease – a dramatic increase on the 7.1 per cent average seen in the same period last year.

Government agencies are among the most reliant on equipment finance, with 33 per cent responding in favour of using an operating lease option to acquire new assets. Meanwhile, the use of a finance lease among government agencies to buy new assets – whereby assets needed are obtained with a lease that provides an ownership option at the end of the term – stands at 19.3 per cent in the September quarter, increasing from the 10 per cent recorded in February 2015.

As a result, alternative funding options among government-associated groups have started to differ in popularity:

  • Buying outright: down to 20.9 per cent in September 2015;
  • Borrowing from the banks: down to 6.1 per cent;
  • Rental: slightly down to 4.2 per cent.

The reason for the notable spike in favour towards leasing among government agencies could be attributed to their need to control their resources more closely with an asset management plan, particularly as governments are often faced with budget constraints.

That being said, there are things to ask and discuss with your lessor to ensure your lease agreement is well understood and will work to your best advantage. Taking the time to understand will not only go towards delivering more significant rewards in terms of equipment life span and productivity, but enhance your relationship with your finance provider.

Information sharing

By giving a finance provider an in-depth rundown of the organisation, including up-to-date financial positioning and business operations details, you are granting them relevant and appropriate insights to use. This will enable a representative from your finance provider to provide you with a recommendation for a leasing solution for your organisation, budget and current situation.

For instance, start by determining your budget for the equipment you need, keeping in mind the expected life cycle of the asset. Also, it’s important to discuss the equipment needed and how it will be used. For example, IT equipment may have a five-year lifecycle, while machinery could be backed by a 10-year plan. Having an idea of what you intend to acquire and how the assets will be used will allow your lessor to assist in the creation of your asset management strategy, so any upgrades and additions can be forecast and made efficiently.

Asking the right questions

Although you should expect your lessor to be open and honest, and the terms of your lease agreement should include everything you need to know, it is also beneficial to ask the right questions before the commencement of your lease agreement.

For example, regarding payments associated with your lease agreement, it is recommended asking:

  • The total number of payments owed. This essentially forms the basis of a lease agreement and will dictate the duration of the agreement;
  • The amount and timing due in each payment. A large number of lease agreements comprise monthly payments but it may make more sense financially for a business to make payments quarterly;
  • If there are additional costs which could accrue during or at the conclusion of the lease term. This could take the form of a residual payment to take over ownership of the equipment.

Finally, there are also some finer points worth discussing that may help a business to budget for ongoing costs and future-proof its asset management strategy. Some of these specific questions could be:

  • Who is responsible for paying any insurance, taxes and maintenance costs for the equipment?
  • Will the finance provider handle installation and removal, maintenance and/or asset management tracking? Is there a maintenance plan associated with the assets or equipment?
  • Is it possible to upgrade or add equipment during the lease terms?
  • What type of support or engagement should you expect to receive throughout the lease term?
  • Should you want to return the equipment prior to the conclusion of the lease agreement, what are your options?
  • What happens at the end of the lease agreement?

Creating an understanding

The September 2015 Alleasing Equipment Demand Index shows that 24.9 per cent of surveyed companies around Australia intend to increase their asset base in the final quarter of this year. This includes 34.8 per cent of federal government agencies and 22.6 per cent of their state-level counterparts.

By working closely with the finance provider and ensuring your business has a thorough understanding of the lease terms at the outset of the agreement, developing a strong asset management strategy becomes a simpler process and ultimately allows the business to make the most of their new equipment.

 

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