When leasing, avoid these Top 10 goofs
By Jenny C. McCune • Bankrate.com

Leasing equipment can be a great idea for a small business. Instead of shelling out a big chunk of change for outright purchase, a company can pay for machinery, computers or other equipment piecemeal as it works its way down Entrepreneurship Row.

But the small-business owner who fails to take care of the details may be in for a bumpy ride when leasing, says Stephen Galop, unit executive for UniCapital Corporation of Miami. "Mistakes can and do happen, and more often than people think," Galop says. Here are his 10 biggest goofs that trip up small businesses that opt for leasing:

Goof 1: Sign a contract that the company can't cancel
A company never knows what the future may bring, so it's always good to have a built-in escape clause -- a way out of its leasing contract, Galop says. For example, a company may want a trade-in clause for a five-year lease, so that if it needs to upgrade equipment in mid-lease, it can.

Goof 2: Agree to lease equipment for longer than its usefulness
The longer the lease, the lower the monthly charges, so the natural inclination is to sign the longest-term contract possible. But be certain that the equipment your company leases doesn't outlive its purpose. "Say you're the owner of an engineering company and you're leasing computers," Galop says. "You sign up for a five-year lease, but the technology you need changes. Maybe another company -- like a real estate firm that's not a high-end user -- can settle for a five-year lease, but you can't."

Goof 3: Forget about fees
When you negotiate with your lessor for a leasing contract, be sure there are no hidden fees. Make sure that you understand what you're going to pay and why. For example, what Galop calls "small ticket" leasing -- contracts of $250,000 or less -- usually requires only a documentation fee. Contracts for larger amounts may require commitment fees. Knowing upfront about all fees can ensure that your company doesn't get any nasty surprises when it comes time to sign the contract.

Goof 4: Sign on with any Tom, Dick or Larry Lessor
Take time to find a good leasing company. "It does make a difference who you lease with," Galop says. Membership in professional organizations such as the United Association of Equipment Leasing and the Equipment Leasing Association is usually a good sign. Also ask for and check references.

Goof 5: Take too many leasing companies for a test drive
While it pays to check out your would-be leasing companies, don't get overzealous in comparison shopping. Galop recalls a woman in the market for a lease. She got estimates from 46 mortgage brokers -- most of whom were working with Galop's company. "It actually affected her credit scoring so she couldn't get the best deal," Galop says.

Goof 6: Fall for too-good-to-be-true scams
Galop recalls an unscrupulous leasing company that called its leasing program "Prime Rate." "That name had as little to do with its terms as yesterday's weather report," chuckles Galop. Unfortunately, Galop knew of one small business that fell for the ruse. Its owner signed the contract thinking that he would be charged prime rate. Of course it turned out that the lease terms had nothing whatsoever to do with the prime rate and the company ended up paying far more for leasing its equipment.

Goof 7: Pay fees upfront before signing a contract
This goof is also known as "falling for the bait and switch." Disreputable leasing companies will quote a fantastic leasing rate and ask the lessor to pay contract fees in advance. The small business happily complies. "Then the leasing company comes back and says, 'Sorry, I couldn't get that approved. Your new rate will be ... ' and then the leasing company quotes a much higher figure," Galop says. The small business is stuck with the higher interest rate or the owner must swallow the upfront fees he already paid.

Goof 8: Neglect insurance
Leasing contracts require insurance on the equipment being leased. If a small-business owner fails to line up insurance, his leasing company will do it for him -- generally for much more money than if owner did the insuring himself. "It's easy enough to just have your current insurance company add an endorsement to cover the lessor," Galop says.

Goof 9: Fail to negotiate purchase terms
If there's even the slightest chance that your company will be interested in purchasing equipment, it makes sense to negotiate such a clause in your contract. Generally, purchase terms will be fair market value or a set dollar amount. If your contract specifies fair market failure, you may want to negotiate a cap for it as well -- not to exceed 10 to 15 percent of the equipment's original value, Galop says.

Goof 10: Don't give notice
Most leasing contracts specify the company leasing the equipment must notify its lessor of its intentions at least 90 to 120 days before the leasing contract ends. That means notifying the leasing company that your company wants the contract renewed, that it wants it to end or that it wants to buy the equipment. If a company fails to give adequate notice, it could be stuck with an automatic renewal of its five-year contract, regardless of whether it wants to lease the equipment for another five years.

If you don't want to end up on Galop's list of leasing "goofs," pay heed to his advice. By doing so, you'll be happier and so will your leasing company.

Jenny C. McCune is a contributing editor based in Montana
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-- Posted: May 11, 2000