Common pitfalls to avoid in the equipment financing process

February 26, 2019

The equipment financing process has changed in past years, but our tips on how to protect yourself from some common hidden fees and surcharges remain relevant. 

 

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.

 

Vague end-of-lease term options

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You don’t want to be stuck with outdated technology in a leasing situation, which will negate one of the largest benefits of leasing.

 

Artificially low base rates

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.” 

 

Software partners who don’t offer 100 percent financing options

“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. 

 

Those hidden, unspecified fees

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:

  • Documentation 
  • Executory
  • Commitment
  • Restocking
  • Uniform Commercial Code (UCC) filing
  • Legal
  • Transactional
  • Service charges
  • Facility charges

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.

Related content

What corporate treasurers need to know about Virtual Account Management

How to open and invest in a 529 plan

Your 4-step guide to financial planning

What to do when you lose your job

4 financial considerations before changing jobs

Annual insurance review checklist

How grandparents can contribute to college funds instead of buying gifts

U.S. Bank asks: Transitioning out of college life? What’s next?

3 emerging technology trends for bankers

Tailor Ridge eBill case study

Friction: How it can help achieve money goals

Retirement planning strategies for dual-income families

5 times you may need a financial advisor

For today's homebuyers, time and money are everything

Here’s how to create a budget for yourself

Understanding guardianship and power of attorney in banking

How to use debt to build wealth

7 year-end tax planning tips

3 types of insurance you shouldn’t ignore

8 steps to choosing a health insurance plan

The connection between your health and financial well-being

Is a Health Savings Account missing from your retirement plan?

7 things to know about long-term care insurance

How to winterize your vehicle

Take the stress out of buying your teen a car

Financial steps to take after the death of a spouse

Retirement planning in the gig economy

Zelle® helps Sunriver Resort make payments efficient and secure

4 steps to finding a charity to support

Estate planning documents: Living trusts vs. will vs. living will

Small business growth: 6 strategies for scaling your business

Unexpected expenses: 5 small business costs to know and how to finance them

Streamline operations with all-in-one small business financial support

Healthcare marketing: How to promote your medical practice

Why ecommerce for small business strategy is integral

Unexpected retirement expenses

Year-end financial checklist

What financial advice would you give your younger self?

How blockchain technology is changing treasury

Blockchain: Separating hype from substance

Enhancing the patient experience through people-centered payments

4 ways to make practical use of real-time payments

How to manage your money when you're self-employed

Personal loans first-timer's guide: 7 questions to ask

Dear Money Mentor: When should I refinance a mortgage?

How I did it: Bought a home without a 20 percent down payment

House Hacks: How buying an investment property worked as my first home

How to set yourself up for success in your first job

How to build wealth at any age

Travel for less: Smart (not cheap) ways to spend less on your next trip

Working after retirement: Factors to consider

7 ways for pre-retirees to get ready for retirement

Multiple accounts can make it easier to follow a monthly budget

First-time homebuyer’s guide to getting a mortgage

9 simple ways to save

Financial gifts can be a valuable – and fun – choice for the holidays

How I did it: Learned to budget as a single mom

Key milestone ages as you near and start retirement

How to stop living paycheck to paycheck post-pay increase

Do your investments match your financial goals?

5 financial goals for the new year

Money Moments: Tips for selling your home

Parent checklist: Preparing for college

Which is better: Combining bank accounts before marriage — or after?

Don’t underestimate the importance of balancing your checking account

Do you and your fiancé have compatible financial goals?

Is it time to get a shared bank account with your partner?

LGBTQ+ financial planning: 7 reasons why it matters

Should I itemize my taxes?

Reviewing your beneficiaries: A 5-step guide

What government officials should know about real-time payments

Retirement income planning: 4 steps to take

LGBTQ+ retirement planning: What you need to know

Using 529 plans for K-12 tuition

How to retire happy

How to protect your digital assets in your estate plan

Can fantasy football make you a better investor?

Digital Onboarding helps finance firm’s clients build communities

Insource or outsource? 10 considerations

Investment strategies by age

Investing for beginners

6 tips on trust fund distributions to beneficiaries

How to track your spending patterns

How to manage your money: 6 steps to take

How to discuss money with your family

Good debt vs. bad debt: Know the difference

How to establish your business credit score

4 tips to help you save for retirement in your 20s

4 reasons estate planning is important

Automate accounts payable to optimize revenue and payments

Want AP automation to pay both businesses and consumers?

Unexpected cost savings may be hiding in your payment strategy

Checklist: 10 questions to ask your home inspector

5 things to avoid that can devalue your home

Addressing financial uncertainty in international business

Leveraging the ASC-842 rule changes in equipment lease accounting

30-day adulting challenge: Financial wellness tasks to complete in a month

5 reasons why couples may have separate bank accounts

7 steps: How couples and single parents can prepare for child care costs

Adulting 101: How to make a budget plan

Dear Money Mentor: How do I set and track financial goals?

What you need to know about renting

Tips for working in the gig economy

How and when to ask for a raise

How can I help my student manage money?

6 pandemic money habits keep for long term

How having savings gives you peace of mind

How to save for a wedding

How to save money while helping the environment

It's possible: 7 tips for breaking the spending cycle

Money Moments: 3 smart financial strategies when caring for aging parents

Personal finance for teens can empower your child

Tips to overcome three common savings hurdles

Webinar: Uncover the cost: Wedding

Webinar: Uncover the cost: International trip

What military service taught me about money management

Your guide to starting a job: Resources to help along the way

It’s time for a fresh start: A new way of thinking

U.S. Bank asks: Do you know your finances?

Money Moments: 8 dos and don’ts for saving money in your 30s

Money Moments: How to manage your finances after a divorce

Money Moments: 3 tips for planning an extended leave of absence

P2P payments make it easier to split the tab

3 awkward situations Zelle can help avoid

What’s in your emergency fund?

Money management guide to financial independence

Your guide to breaking the rental cycle

Webinar: Uncover the cost: Building a home

4 ways to free up your budget (and your life) with a smaller home

10 questions to ask when hiring a contractor

10 ways to increase your home’s curb appeal

Webinar: Uncover the cost: Home renovation

Beyond the mortgage: Other costs for homeowners

Tips for navigating a medical hardship when you’re unable to work

11 essential things to do before baby comes

How to plan and save for adoption and in vitro fertility treatment costs

Closing on a house checklist for buyers

Resources for managing financial matters after an unexpected death

What you need to know as the executor of an estate

What documents do you need after a loved one dies?

How to prepare for a natural disaster

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

How I did it: Paid off student loans

Webinar: Bank Notes: College cost comparison

From LLC to S-corp: Choosing a small business entity

7 steps to keep your personal and business finances separate

How to apply for federal student aid through the FAFSA

Be careful when taking out student loans

Your financial aid guide: What are your options?

Banking connectivity: Helping businesses deliver the easier, faster, more secure customer experience of the future

ABL mythbusters: The truth about asset-based lending

Military homeownership: Your guide to resources, financing and more

Crypto + Homebuying: Impacts on the real estate market

Integrated receivables management solution supports customer focus at MSC Industrial Supply

ABCs of APIs: Drive treasury efficiency with real-time connectivity

Webinar: Mindset Matters: How to practice mindful spending

Webinar: ESG for Corporations: Building an all-weather, long-lasting strategy

How emerging banking solutions enable better decisions

Empowering managers with data automation and integration

Common pitfalls to avoid in the equipment financing process

The secret to successful service provider integration

Colleges respond to student needs by offering digital payments

The cyber insurance question: Additional protection beyond prevention

How running a business that aligns with core values is paying off

Meet the Milwaukee businessman behind Funky Fresh Spring Rolls

I own two electric vehicles. Here’s what I’ve learned about buying and driving EVs.

Car shopping Buying versus leasing your next vehicle

Questions to ask before buying a car

What you should know about buying a car

How to choose the best car loan for you

What you need to know before buying a new or used car

How electronic billing platforms improve government payments

How I did it: Turned my side hustle into a full-time job

How to get started creating your business plan

Talent acquisition 101: Building a small business dream team

Make your business legit

7 tips to help grow your business after launch

How to test new business ideas

Costs to consider when starting a business

How to redefine challenges with business collaboration

How to sell your business without emotions getting in the way

5 steps to take before transitioning your business

10 tips on how to run a successful family business

The costs of hiring a new employee

How to expand your business: Does a new location make sense?

How to build a content team

Investing in capital expenditures: What to discuss with key partners

3 ways to gain loyalty with your customers

Finance or operating lease? Deciphering the legalese of equipment finance

Buying or leasing? Questions to ask before signing a contract

Time is money: Intelligent Payment Routing saves businesses both

Digital trends poised to reshape hotel payments

Digital banking for business: How connectivity improves customer experience

Safeguarding the payment experience through contactless

How AI in treasury management is transforming finance

Automate escheatment for accounts payable to save time and money

The benefits of payment digitization: Pushing for simplicity

Collect utility and telecom bill payments faster

Treasury management innovations earn Model Bank awards

ABCs of ARP: Answers to American Rescue Plan questions for counties

The AI journey in finance: How to make it part of your strategy

Should you buy a house that’s still under construction?

COVID-19 safety recommendations: Are you ready to reopen?

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.

U.S. Bank is not responsible for and does not guarantee the products, services or performance of U.S. Bancorp Investments, Inc.