One of the most common sources of administrative cost abuse comes in the form of lease contracts for common office equipment. Frankly, the advantages of leasing for any company other than the smallest of organizations, those without access to capital, are almost non-existent; and this includes tax benefits. And while large organizations may wish to lease to avoid depreciation and capital budgeting approvals, the surprise or hidden costs of entering into a lease can easily nullify any benefits accruing from circumventing corporate procedures. The following is a list of reasons why leasing should be an organization's last recourse; don't forget that needed funds can often be secured through banking institutions with straight-forward repayment terms.
1. Interest rates are considerably higher with leases, as opposed to bank borrowing.
2. Because lease rates are not controlled, and are often not clearly stated in a contract, there exists an opportunity for the sales representative to build in extra costs which affect the lease payment.
3. The funds for leased equipment often come from a capital lending company, which separately bumps up the payment amount (a tactic referred to as overfunding) and then kicks back something to the equipment provider.
4. Lease contracts will frequently include separate additional charges of 3-8% for property insurance, which is normally covered automatically in a standard business property insurance policy. These charges can be eliminated by providing proof to the leasing company of such insurance coverage.
5. Lease contracts often require the customer to provide notice within 90 days (and up to 180 days) of their intentions to terminate the lease. If the customer fails to do so, the leasing company can renew the lease for another twelve months and the customer is stuck. In addition, the requirements may include a provision that the termination notice be delivered by certified mail, but only a P.O. Box number is supplied as the recipient address, making the certification impossible!
6. If the customer attempts to terminate a lease prematurely, they may be surprised to find that the rules will not provide for payout of the term of the lease unless the lessee commits to purchasing the equipment at 20-40% of original equipment cost.
7. As the typical bill for leased equipment does not clarify that the lessee has paid, for example, 48 of 60 months, customers continue to pay in response to delivered invoices as they are unaware that the lease term has expired.
8. Verify invoices! Often times a lease contract may provide for a payment of, for example, $200/month, but the monthly bill requests a payment of $240.
9. Watch the fine print! Many lease contracts will stipulate that at the end of the lease term, it is the lessee's obligation to ship the equipment to a destination of the lessor's choice and be responsible for shipping costs and liability for the equipment until it is received and accepted.
10. Due to increasing levels of questionable business practices in leasing, a dollar- buyout lease is the best way to determine and control total cost of ownership. If faced with no other recourse than to make a lease decision (have you checked with your bank?), secure the dollar-buyout variety, in which the lessee is automatically charged one dollar for the equipment at the end of the lease term.
11. The loyalty of leasing companies is to the vendor as opposed to the end user. Often there is no direct contact available through the leasing company; instead, customer communication can be limited solely to the vendor.
And this cannot be stressed enough – read all contract terms carefully and be sure you are in agreement with the terms. Furthermore, require that written clarifications be included in the lease from the vendor or lessor with respect to anything you don't completely understand.
Those responsible for managing an organization's indirect cost structure may find links in the biography section particularly useful.
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Don Steiner, founder and CEO of Profit Recovery Partners, LLC, is recognized as one of the nation's premiere experts in the area of administrative expense reduction solutions for the Fortune 1000. To contact Don, or for more information on how PRP may help your organization achieve a lean indirect cost structure and improved profit margins in pursuit of competitive advantage, please visit www.prpllc.com and www.prpllc.com/newsroom.asp#cost
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