What you think you know about equipment leases could end up hurting you. And what you don’t know will cost you BIG money.
Puzzled by the meanings of leasing terms?
The language of equipment leases is cryptic and complex. I’m committed to help you decipher and understand it better.
Understanding leasing terms will help you determine:
- If leasing is better than paying cash or taking out a bank loan.
- How to save money when you negotiate.
I am writing a comprehensive dictionary of all leasing terms. Before it’s published next year I’ll give you the meanings of the most important leasing terms in my blog. I will feature a new term each week.
The first term is Fair Market Value. You’d be surprised how this term is confused and misused!
Fair Market Value (FMV) is the price for which property could be bought or sold in an arm’s-length transaction between unrelated parties. Some leasing companies define FMV as the equipment value at the end of the lease determined after taking into consideration recent sales of similar equipment, obsolescence factors, deinstallation costs and resale expenses. Unfortunately, most customers expect the FMV to be the price of the used equipment in the marketplace at the end of the lease term.
TIP: Before signing the original lease, the customer should negotiate the FMV definition and process for determining the purchase price. A negotiated lease agreement avoids confusion and disagreements at the end of the lease term. A “standard” lease document is written by the leasing company and its attorney. And guess who is protected by that document?
The negotiated FMV definition should include the customer input regarding the purchase price. The process may involve outside used equipment industry appraisers. If an independent appraiser is used, the cost of the appraiser is borne equally by both parties. If each party wants an appraiser, they each pay for their own appraiser.
The end of lease purchase process should allow for adequate time for negotiation of the price, renewal options or a timely equipment return.
REAL LIFE: Last week we negotiated the end of lease purchase price for one of our clients. We achieved a 10% reduction in the purchase price for our Midwestern manufacturer. We saved them $13,000 on the the price of their Cisco servers as their lease ended. This company had never tried to negotiate the Fair Market Value purchase price before.
If you don’t negotiate at the end of every lease, start now. Big savings are possible.