Demystifying Leasing The world of leasing can seem a confusing landscape of options and costs. You may have heard conflicting information; some good, some bad, some neutral. I'm going to attempt to clear up this financial maze called leasing and suggest what to avoid and what to pay attention to. So why is there so much mystery? There are really only two reasons: First, the people in the financing industry have made it way too complicated exposing you to way too many lease types when you really only need two; and second, a lot of business owners may have had a negative experience with less than reputable leasing companies in the past. The Basics The simplest definition I've ever heard for a lease is this: A lease is an agreement for you to use something I own. If I am the leasing company, I pay the manufacturer for the equipment you're using and require you to make a periodic payment (usually monthly) to me, the leasing company. I make money on the payment stream and you make money on using the equipment the moment it's installed. The idea is that the monthly payment is a fraction of the monthly revenue the equipment creates. This is especially important if you present a bundled, Cost per, or Managed Print Services (MPS) solution. There's a rich history of leasing, but briefly, this type of transaction first came about 4000 years ago and was typically for agricultural tools or field animals. Many years later, in the early 1900s, manufacturers found they could sell more products by offering a payment plan for their equipment. As a selling tool for vendors, leasing entered the business mainstream and now accounts for $600 billion in the U.S. equipment finance marketplace (Equipment Leasing and Finance Association, 2010). The Financing Industry Has Made Leasing Too Complicated If you Google "lease types," you'll get some websites that have 15 to 20 different types of leases, some using different names for the same type of lease. Choices are great, but it can make it more difficult for you to make a decision, and this is where the leasing industry has failed the customer. There are a variety of lease types and most resellers are familiar with the two most common: One dollar ($1) and Fair Market Value (FMV). Dollar leases can be very popular because they are straight-forward - there is no ambiguity about who owns the equipment at the end of the lease term. The Lessee is allowed to depreciate the equipment over the term on $1.00 leases and is also eligible for favorable tax treatment under Section 179 (see your tax advisor). A Fair Market Value (FMV) Lease has lower monthly payments through the stream and ownership of the equipment is negotiated at the end of term between the Lessee and the Lessor. The Lessee can either walk away from the equipment at the end of the lease term or purchase it for the "fair market value." Discovering this value, referred to as the "residual value," is when you realize if you've picked a fair leasing company. Some will inflate the residual value to make greater profits. It is always a good idea to ask for the residual value in writing before having your customer sign a FMV lease. It is important for your customer to know what kind of lease they are being offered. Rates that produce a very low lease payment might be FMV leases or have some kind of end of term payment required or other terms that lead to the "hot stove" effect. The "Hot Stove" Effect Some customers have been burned by leasing companies. As a result, they say they'll "never lease again" because of their experience. And just like any story, bad news spreads a lot quicker than good news. Borrowing from Mark Twain, I characterize this problem as the "hot stove" effect. Twain said if a cat jumps on a hot stove, he probably will never jump on a stove again. That's smart, but the cat will never jump on a cold stove either. And when that happens, there are opportunities that will be missed. Business owners who have been burned by a leasing company will benefit from rethinking their stance and realize that all leasing companies are not alike. Leasing companies that have poor regard for their lessees tend to give the industry a bad name. Given a bad experience, customers may conclude that all leasing is in general not good and miss out on opportunity. Test The Stove To See If It's Hot Leasing is an unregulated industry and there could be a lot of shenanigans from ethically challenged companies that might hurt your customer's business. To protect them, make sure you are working with an above-board leasing company with good references and a reputation for understanding your industry. Some leasing companies try to present a low price while providing poor service - avoid them! Poor service and the inability to get through red tape and voicemail will only end up in frustration. Remember, relationship with the leasing company should be a partnership that helps you with current and future purchases. As noted above, there's also potential that a "low price" is being recouped with hidden charges. Find those hidden charges. Ask the leasing company what to expect at the beginning, throughout the agreement, and at the end of the term and get their answers in writing. Make sure you know how much the "documentation fee" or other miscellaneous fees are since these can vary widely from one company to the next. Ask your leasing company if they will charge a fee for the handling of property tax or additional changes associated with "cost per" programs. Hopefully this has cleared up some of the mystery of leasing and gives you more options when you're growing your business. Jennie Fisher is the Senior Vice President and General Manager of the Office Equipment Group at GreatAmerica Leasing Corporation. She is responsible for sales, marketing, operations, and financial performance for this business unit. She has been involved in lease financing since 1989. Prior to joining GreatAmerica in 1993, Fisher worked for GE Capital. She earned her M.B.A. from the University of Iowa.