This article is the second in a series that follows the equipment financing process from initial brainstorming and consultation to final contract signing. In this article, we focus on the common pitfalls in financing contracts that might befall an organization during the signing process.
“It is far better to catch these pitfalls before organizations go down that primrose path,” said Riley Thompson, vice president of Equipment Finance at U.S. Bank. “If a vendor offers you a tempting zero percent quote, figure out what the catch is before signing. We want to educate early, up front, and then open up conversations later so everyone understands what they’re getting into.”
While in the process of seeking financing for an equipment refresh, several potential pitfalls might make things difficult for an organization down the line. Protect yourself and your business by identifying and mitigating these issues early, and before signing any contracts.
Here are a few common hazards found in equipment lease contracts.
Everything in your leasing contract might look good at the start, but shady vendors might try to hide preferential terms in the end-of-lease section. This could greatly cost your organization at the end of your lease, when your equipment is approaching its warrantied lifespan.
Address this concern by making sure that your end-of-term options in the proposal match those in the lease agreement and riders. Also ensure that, if desired, your company has the ability to return the equipment without further obligation at the end of the lease term.
You don’t want to be stuck with outdated technology in a leasing situation, which will negate one of the largest benefits of leasing.
Those zero percent financing offers may sound tempting, but it generally just means you’ll end up paying more over the long term. If it sounds too good to be true, look into the terms and find out where your vendor is basing those rates.
“When you get an offer of zero percent financing, all that means is that the vendor will charge more for the software you’re buying,” said Thompson. “Shady vendors may give a quote based on the rate at the beginning of the month, while we generally give a quote indexed off of today’s rates. Rates change daily, and using an indexed rate from the first of the month isn’t as helpful, but clients don’t often ask that question.”
Thompson argues that clients can avoid this scenario by offering to pay with cash, and use any counteroffer as their eventual financing goal.
“If you want to get financing on your best terms, first don’t tell the vendor you want to finance,” Thompson said. “Say you’ll pay cash, and then see what they offer as a lease option. They’ll come back to you with a cash price, which you can then offer up as a financing target.”
“Picture this scenario, which happens all too often: Vendors who sell software often partner with outside organizations, and they don’t always offer a 100 percent financing option,” Thompson said. “Unfortunately, this little detail doesn’t get discovered until the 11th hour, when the partner only covers an 80 percent loan-to-value ratio – forcing the lessee to cover the remaining 20 percent.
Thompson notes that this cost can hamper organizations at the end of the negotiating term, when it may be too late to back out of the deal.
Hidden fees buried in financing documents can trip up organizations, especially near the end of negotiations. Under the guise of “transaction fees” or something similar, these surcharges add to the total cost of leasing.
Thompson argues that these fees are very common in the current leasing marketplace, and can add up quickly.
“It is always the little details that need to be highlighted during negotiations,” Thompson said. “Take interim rent, for example. It’s a common hidden fee in the industry, usually when a provider asks the prospective lessee to sign a lease schedule with a predetermined end date. This all but ensures the lessee will pay interim rent.”
Some other common hidden fees include:
These potential pitfalls, found during the process of signing financing contracts, could make things difficult once the lease expires.
It’s in your interest to address them before you sign anything. We can help decipher the common phrasing used in equipment financing documents.
Contact a U.S. Bank Equipment Finance specialist to discuss your unique situation.