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Recourse Versus Non Recourse

“What Is The Difference Between Recourse And Non Recourse With An Equipment Lease?”

Any equipment lease that you are looking to enter into or already are participating in will either have a lessor clause related to recourse.

Recourse provides the lessor with the right to take collection actions against the lessee and signed guarantors in the even that the liquidation of the asset or assets held as security fail to retire the debt outstanding.

In the situation of a lease, the leasing company owns the asset that you are using under a lease agreement.

If you default on making payments to your lease agreement or have some other type of default, the lessor has the right to claim their equipment from you and liquidate it, applying the proceeds from sale to the amount still owing on the lease.

Recourse comes into play when there is still funds outstanding at the end of the liquidation process.

Non recourse does not provide the lessor with any other collection rights to get back the amounts still owing.

Most equipment leases are provided with recourse to the business and whoever else has guaranteed the lease.

Some leasing companies will offer non recourse as different product to the market to attract businesses that are looking to contain the business liability to the equipment being financed.

Under a non recourse agreement, the terms of financing typically will provide a greater security value in the assets being funded.

For instance, instead of providing 100% financing under a recourse agreement, a non recourse agreement may provide a lesser amount of financing on the asset to provide greater security margin to the lender.

In the short term, this would require the business to provide a larger down payment, but in the worst case scenario their risk to the transaction would also be limited.

Recourse can also be provided by third parties to the transaction such as the dealer selling the equipment or a totally unrelated party.

This provides the leasing company with a liquidation pathway for the asset in the event of default.

An example of this would be a dealer that sells used equipment and provides recourse to various lenders on assets they are funding.

This is typically limited recourse in that the dealer will promise to pay a certain percentage of the market value of the asset.

The dealer does this to be able to get assets at a good price to place on their lot for resale.  If the dealer is selling the initial asset, this also a way for the dealer to complete the sale by providing some form of recourse to a lender so that financing can be put into place to close the purchase and sale transaction.

If you are looking at an equipment lease that has a recourse clause in it, make sure to read through it carefully so you understand the extent of the recourse.

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Leasing Payment Terms

“Depending On Your Business, There Can Be A Variety Of Payment Term Options”

The most common form of lease repayment,  similar to any type of loan or mortgage, is a monthly repayment of the principal and interest associated with the lease outstanding.

But there are also other potential payment options that can apply to your particular business.  The key is that they make sense to the lender as well as your own cash flow.

For instance, it is possible to get quarterly, semi annual, and annual lease payment schedules.

You may be able to arrange monthly payments for your “in season” period and no payments out of season.

Repayment terms other than monthly are most common with seasonal businesses such as farming, road construction, and so on.

From the lease company’s point of view, the most important thing they are going to be looking at when considering a payment term other than monthly is the historical proof of how your cash flow comes in.

This is typically done with bank statements showing large amounts of deposits in one part of the year than another.

This can also be supported by contracts and statements of account from customers that are paying you at certain times of year.

In addition to the timing of lease payments through out the term, there are also other payment aspects that can also be adjusted or modified as well.

For instance, when you first sign up for a lease, there may be options to delay the first payment by one or two months, assuming there is a rationale for doing this.

Also, during the lease term, if there is a cash flow crunch you may be able to defer one or more payments for a series of months with a plan to catch everything up in the near future.

The amount of the payment can also be adjusted by what we refer to as a balloon payment at the end of the lease.

Depending on the applicant, the amount of financing, and the asset involved, there are leasing companies that will allow 35% to 40% of the principal amount of the purchase price to be deferred for repayment until the end of the lease term.  Balloon payments are usually classified as operating leases if the balloon amount is at least 10% and capital leases if less than 10%.

This can potentially reduce the lease amount considerably during the term which will benefit the cash flow of the business.

Getting back to payment interval, if a leasing company is going to accept something other than monthly, its likely that the industry you are working in will also be factored into the equation.

For instance, if you are working in an industry where the standard for payment is throughout the year, then it’s very unlikely that a non monthly payment option will be extended.

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Levels Of Credit

“Here Are The Different Levels Of Credit In The Equipment Leasing Market Place?”

One of the great aspects of the equipment leasing and financing market is the breadth of credit profiles that can potentially get financed from different leasing companies.

When I refer to credit, its more of a generic term here for credit and financial strength of the business all rolled into one bit of terminology.

Each level of credit is going to influence the cost of lease financing you can secure as well as the related terms for repayment.

Starting at the lowest risk financing and working our way down, there are basically two types of “A” credit categories.

The difference between the is going to come from the amount of established commercial credit and the financial scale and net worth of an existing business.

Lets call the higher level of credit “A+” and the lower level of high end credit “A”.

Once again, the only real difference between these two is larger, more well established company, versus smaller, less established company.

The difference from a leasing financing perspective is mostly going to be rate related where the “A+” credit can access slightly lower cost debt due to the overall strength of their credit profile and larger size transactions.

This distinction is important in that even if you have been in business for ten years as a small business and have near perfect credit, you still are not likely going to be able to secure the absolute best rates of financing that will be provided to the “A+” class of businesses.

For the most part, the vast majority of small and medium sized businesses fall in the “A” credit category across all industries and geographies.

The next classification of credit is “B” credit which typically relates to businesses with slightly bruised credit or some type of strain in their financial profile.

These companies are operating and have the cash flow to service debt, put are not in as strong a financial position as compared to an “A” business credit profile, so the risk of loss to a loan or leasing company is going to be higher which will result in higher rates and terms.

“B” credit lenders are a very important part of the market as there are many companies from time to time that cannot qualify for “A” credit and without an alternative would have a very difficult time gaining access to the capital they require.

The fourth and last class of leasing company is “C” credit.

For these business there is a certain amount of credit, financial, and cash flow distress in the business and the possibility of default and even business failure is much higher than the other ratings.

Leasing companies that focus on these types of deals typically are in the asset liquidation business as well, or are closely aligned to some form of liquidation entity due to the fact that if this type of deal does not work out, they need to know exactly how to liquidate the asset for the most money possible in order to recoup their capital investment.

“C” credit financing rates typically will fall into the 18% to 24% range and can require more equity in the deals by the owners to provide more security margin for the lenders.

The key to getting the best rates and terms is to understand what level of credit your business currently has, and then to work with the appropriate leasing company to get equipment financing that can meet your requirements.

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Lease Approval Speed

“How Fast Can I Get A Lease Approval?”

When applying for lease financing for a piece of new or used equipment, business owners many times wonder how fast the application and approval process can be.

This is most common in situations where the applicant is new to lease financing and is comparing the potential application process to what they may have previously encountered at a bank or other financial institution when applying for some form of loan or mortgage.

One of the key benefits of equipment financing via an equipment lease is the speed of the application process.

In the high majority of cases, approvals can be secured within 24 to 48 hours with funding to follow shortly there after.

The length of time can also certainly be longer if there are more risk elements for a leasing company to asset and go through.

Larger deal sizes will also potentially require additional time as more than one level of approval may be required.

For the most part, if you have good credit and a solid financial profile, a leasing approval is going to be provided to you in 24 hours most of the time.

Compared to a bank loan process this is exceptionally fast and hard to match.

And when you have the ability to get financial leverage at or near 100% of the asset value, leasing can become a powerful option to consider.

But like any type of application process, the more accurate and complete an application package is, the easier its going to be for someone to assess the information and provide a lending/funding decision back in your favor.

This point cannot be over stated as poorly prepared and presented information can end up adding days to the process with the back and forth required just to clarify the facts.

Even worse, interpreting poor information incorrectly can just lead to a decline without any clarification even requested.

Another benefit of the leasing process is the amount of information that is initially required for most deals.

To make a formal request for financing, all you need to provide initially is a completed and signed application form along with an invoice, estimate, or quote from the seller for the asset you want to acquire.

From this information alone you may be able to get an approval issued, especially if the amount of financing requested is under $100,000.

There may be other pieces of information required prior to funding, but that usually does not slow down the process provided you can get the information back to the leasing company as soon as possible.

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Lease Prepayment Options

“Make Sure You Understand A Leases Prepayment Options Before Entering Into An Equipment Leasing Agreement”

If you enter into an equipment leasing agreement for your business, it would be wise to make sure your fully understand your prepayment options before signing off on your commitment.

Prepayment is the act of repaying some or all future payments in advance of when they are due.

Any type of financing facility that requires payments over time like a lease financing arrangement, will have some sort of prepayment policy or clause or conditions written into the leasing agreement.

In general terms, if a loan or lease is based on a variable rate, prepayment can occur without penalty, meaning you can pay out the remaining principal balance without incurring any further costs.

When a financing facility is underwritten with a fixed interest rate, there is likely going to be some sort of prepayment penalty for paying the loan or lease down or out early.

This is because the financing company will acquire the funds at a fixed rate price and provide it to you at a markup price or a price with a margin built in.

If you pay out the lease early, there is no guarantee that the leasing company will be able to place the money prepaid in the market for a similar margin, and in fact could result in a loss to the financing company.

When we think of loans and mortgages more specifically, there are defined prepayment penalties that include three months interest penalties or interest differential.  These penalties are calculated and charged on amounts paid in advance.

In the leasing world, there tends to be more confusion around prepayment penalties as there is a less formalized approach among lease providers.

For instance, most small ticket leasing companies providing financing under $200,000 will say that they don’t have any prepayment penalty at all and that you are only required to make all the payments in full.

But after closer inspection to the above statement, we can find an indirect prepayment penalty that does exist.

Referring back to our mortgage example, if you incur a prepayment penalty on a mortgage, you pay the penalty plus the principal you want to pay in advance and that’s it.

Small ticket leasing companies will not charge a prepayment penalty so to speak, but they will require you to pay all the remaining principal an interest in most cases.

Because the remaining future interest is going to need to be paid as well as the principal, then this effectively becomes a prepayment penalty of sorts.

Once again, this is not going to be the case with all lease agreements, but it is with most, especially for smaller financing amounts.

This is why its important to understand this aspect of your financing agreement, especially you have an intention to repay all or a portion of the lease back early.

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