Stop Paying Evergreen Fees for Equipment Leases
Equipment leases are multi-year contracts with a very important financial decision at the end of the term. At the end of a lease, lessees must decide if they want to renew, buyout, and/or return the leased equipment. On one lease, you may have a partial renewal, partial buyout, and partial return. Your choice at the end of term all depends on the circumstances and the needs of your users. Most companies lease with the intention of returning the equipment at the end of the initial term.
The end-of-term decision typically must be made at least 60 days before the lease ends so the lessor can be notified pursuant to the contract terms. All too often this process happens inconsistently, late, or not at all. A lack of action at end-of-term, as with many contracts, can result in an “evergreen” lease. Failure to track equipment properly and proactively manage the end-of-term decision and logistics is the most common and costly error made in this spend category. Lessors know this and bank on it – it’s their business model. There are many three-year leases out there on their fifth year.
Large companies are the most common victims of end-of-term “spend leakage.” In these cases, when you add up all the payments (and calculate their Present Value), they exceed the cash purchase price significantly – often by 125% of what you would have paid had you bought the equipment. When this happens, what’s the point of doing a lease vs. buy analysis?
How to Reduce Evergreen Fees for Equipment Leases
To reduce evergreen fees for equipment leases you have to do two things in parallel:
- Triage your existing portfolio to remove evergreen leases, and
- Define and roll-out an end-of-term management process and best practices to protect those leases that are still within their initial term.
Start by capturing all of your equipment lease documents. Then:
a) Abstract the key data elements into a centralized database
b) Sort by dollar value and age of the evergreen payments
c) Triage the largest and oldest evergreen leases first.
There are automated tools that can help you with the triage process. This will give you the best bang for the buck.
What Do Best-in-Class Companies Do?
- Track assets throughout their lifecycle to end-of-term
- Notify current asset owners prior to the end-of-term with adequate time for analysis
- Add workflow for other stakeholders such as procurement and treasury
- Provide guidelines for making the end of term decision
- Provide performance scorecards for each stakeholder or group
Nada. You should have bought it. And therein lies the savings opportunity.
Learn More about Enterprise Lease Accounting
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