Gas station and convenience store owners seeking equipment financing for their operations should know these basic facts about equipment leasing to make the best decision for their business.
The advantage of equipment leasing is that it makes expensive items more affordable for the business owner, or lessee, and enables him to take advantage of tax laws that allow expensing of the equipment’s lease payment (faster depreciation, in essence, than with a purchase or traditional loan). The incredible flexibility of these leases can make equipment acquisitions much easier.
The equipment lender, or lessor, should be able to provide more attractive financing than a bank because he understands the secondary market of the equipment and know how to profitably dispose of the item at the end of the lease. The higher value the lessor expects for the equipment at the end of the lease subsidizes the payments for the lessee during the term. Until recently a lessee could return the equipment to the lessor at the end of the term with no penalties, and no questions asked.
Many of today’s “leases” though are barely leases at all, as far as the lessor is concerned. They make the structure of the lease so one-sided that virtually all of the risk, aside from collecting payments, is passed off to the lessee. Increasingly lessors are ratcheting down their risk as far as the anticipated value of the equipment at the end of the lease. What had been their forte — and what made some lessors more successful in a particular niche — is being replaced by lengthy verbiage.
This trend started when newer lessors began to compensate for lack of industry knowledge with contractual language that leveled the playing field. By doing so, they appeared to offer similar terms to the established firms — but the fine print revealed that the end-of-term options were far less accommodating to the lessee. The period of time that the lessee has to notify the lessor of their end-of-term decision (purchase, return, renew the lease, etc.) has shortened. The rules stipulating condition and location of the equipment and its peripherals (in one case, allegedly, even the box, packing and user’s manual) upon return became more onerous.
When considering an equipment lease, it is important to know the six main components of the transaction.
- Present value (the price of the equipment, less the down payment, trade-in, etc. (Do not deduct your advance payment[s])
- Monthly payment amount
- Number of payments
- Future value (the stated price you will pay at the end-of-term if you decide to buy the equipment, demand a specific dollar amount as opposed to a percentage)
- Interest rate. If you know the above factors, you can determine the interest rate. We can suggest this lease calculator to help with the calculation.
- Requirements for returning the equipment at the end of the lease. Make sure you completely understand the requirements, and that you believe them to be reasonable. If there is a penalty to return the equipment, it should be included in the future value number of the interest rate equation.
A fair lease should have a specific dollar amount buyout, a reasonable return option, a stated renewal rate with short term, and a reasonable period of time for the lessee to notify the lessor. Be wary of unusual or unnecessary terms. Some leases require additional insurance coverage, for example.
Above all, read the contract carefully before you sign. Our viewpoint is, if the document is too long for the average layman, or worded in such a fashion that it’s difficult to understand, it is probably not worth signing.
Keep in mind that it’s to the benefit of the lessor if the lessee forgets to advise of their end-of-lease choice within the stipulated notification period. The lessor can then continue to bill the customer indefinitely.
Equipment leasing is most suitable for relatively low-cost, high tech items that will become obsolete and may need to be replaced on a regular basis. Leasing “big ticket” items, such as pumps, tanks and canopies, may have a significant impact on the gas station or convenience store owner’s ability to get a commercial loan or mortgage at a later date.
Author: Ted Smith
