What To Know Before You Sign A Leasing Contract

Posted on April 18, 2017 by Lexi Tucker - Also by this author

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To figure out exactly how you’ll pay for the vehicles that provide your livelihood requires some education and research. Depending on a fleet makeup, turnover, and capital budget, leasing may be an option, as long as you know what to look out for and when to walk away, experts say.

What should you consider before leasing a vehicle?

First, understand what you are getting yourself into, says Ed Kaye, co-founder and president of Access Commercial Capital in Lake Success, N.Y. Just as all transportation companies are not alike, neither are all leases or leasing companies.

“Make sure you’re dealing with a reputable firm, read the lease agreement, and ask questions before you sign,” he explains. Are there any mileage restrictions or prepayment penalties? What happens to your payoff if the vehicle is totaled or stolen? These are all important queries that should be properly addressed.

Ed Kaye, co-founder and president of Access Commercial Capital
Ed Kaye, co-founder and president of Access Commercial Capital
“If the answer you receive is different than the terms of the lease agreement, ask for a separate writing, in simple language, that memorializes your understanding,” Kaye says. “You may need it in the future.”

Jared Zimlin, business development director of Priority One Financial Services in St. Petersburg, Fla., says operators should consider two different questions when choosing: Do you intend to keep the vehicle or replace it a few years down the road, and does your accountant see a value in a lease versus a loan?

“If you plan to keep the vehicle, a loan or $1 buyout lease may be a better option as there’s not a large residual or balloon at the end of the term,” he says. “If you plan to trade the vehicle in, see if the lender or the dealership has a lease program that allows you to return the vehicle for a newer model at the end of the term.”

 This way, you can ensure you are providing the vehicles your clients demand while only making payments based on the time you are using it, not based on the total retail cost.

The use of capital, or OPM (“other people’s money”), is not something to take lightly when you are trying to build and grow a stable business, says Andrew Aldridge, president of GPD Capital Services in Santa Clara, Calif.

Although it may seem obvious, many overlook the difference between a leased vehicle and a financed vehicle: Who owns it. In a lease, those who are funding the vehicle are the owners. When a vehicle is financed, the operator owns it.

“There are an abundance of things to think about when making the best choice for a particular business; these include the rate, sales tax treatment, accountancy treatment, title questions, registration issues, insurance requirements, and payoff consequences,” he explains.

Look Out! Potential Pitfalls

Kaye says: “Leases can be loaded with fees. Understand what’s due at the start and the end of the lease, how much you are responsible for, and if they are negotiable.”

Zimlin says: “Be sure to get full disclosure on rate, payment, fees, down payments, pre-payments, and end of term options. A reputable lender or finance company will provide this information. Also, some leasing companies and online lenders have language in their contracts that allows them to have a blanket lien on all assets. Read the fine print. What a buyer does not want to have happen is: You trade in one of the units you think you own free-and-clear only to find out, when you did the recent lease or loan, the lender placed a blanket lien on all of your assets. The bank could ask to have the note satisfied in full on the one unit to release the lien on the unit the buyer thought they owned.”

Aldridge says: “Watch out for early payoffs, misrepresenting APR, accepting a longer term that does not fit the asset depreciation value, excessive credit report pulls, and being offered an inferior funding program despite qualifying for a better one.”

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