Equipment leasing is an attractive equipment-procurement option for many enterprises for numerous reasons, including reduction of upfront cost, improved cash flow management, and elimination of equipment ownership risk.
But there are significant risks associated with equipment leasing that any enterprise should be aware of before entering into lease agreements. Monitoring the cost of equipment leasing is the foundation for properly evaluating these risks. Consider the following seven benefits of monitoring leasing costs:
1. More accurate buy vs. lease analysis.
The most common method of compare the cost of leasing to the cost of purchasing focuses on the lease rental stream but ignores other costs. Accurate information about historical leasing costs is essential to generating realistic projections of equipment lease costs for the analysis.
2. Determination of total cost of ownership.
When evaluating the efficacy of a leasing program, enterprises need to consider more than simply committed rents. Lessors make their business models work with additional costs, such as interim rent, extensions, and onerous equipment return policies that make compliance difficult. By monitoring ongoing contract expenses —not just the rents, but all associated costs—an enterprise can be clear about how much they’re actually paying to lease equipment.
3. Risk identification.
Monitoring the cost of equipment leasing allows an enterprise to recognize and quantify the risks of leasing from particular leasing company. Monitoring makes risk identification much more of a science and much less of a guessing game.
4. Guidance in structuring end-of-lease terms.
The end of a lease can prove costly if the lease agreement is structured in a way that gives the lessor leverage at this stage. For example, if the contract allows for a buy-out for “fair market value” as agreed upon by both parties, the lessor is an a position of relative strength because the lessee will still be paying rent until agreement on what’s “fair” is reached.
Comprehensive monitoring of equipment leasing costs allows a lessee to pinpoint problematic end-of-lease terms and conditions and determine their real cost. Armed with this knowledge, lessees can develop an astute strategy for securing more-favorable end-of-lease conditions.
5. Negotiating leverage.
Every aspect of a lease that has cost consequences can be better negotiated with accurate, complete contract performance data. Lessees who don’t understand their real costs put themselves in a weak negotiating position because of their lack of clarity. Not only are they making decisions based on unconfirmed assumptions, they have no evidence to support their cost claims during negotiations.
6. Evaluation of lessors.
When enterprises constantly monitor contracts, they are able to develop an in-depth analysis of lessors to help in their lessor selection process. Thorough monitoring of leasing costs is the only sure way to determine which lessors consistently offer the most value and which ones should be avoided.
7. Discovery of operational inefficiencies.
Making detailed observations about equipment leasing costs will reveal opportunities for operational improvements in areas such as asset management, equipment return scheduling, maintenance, and user training for leased equipment.
Conclusion
There’s no way to effectively evaluate the risks of equipment leasing without a method of analysis for continuously monitoring and assessing leasing costs.
