KNOW THE EQUIPMENT AND VENDOR
We understand that risk is inherent in equipment finance. If you are too conservative, you will starve for lack of business. To get the next deal you may need to push the boundaries of your company's experience in market area, equipment type, financing structure, deal size and known business partners. However, doing your homework on the equipment and vendor can reduce the risk of a substantial economic loss in the event of a default.
Equipment.
When you finance a type of equipment that you have never financed before, educate yourself about how the equipment is valued, its economic life, secondary market for the equipment, risks of the technology and the danger of the equipment to others. These issues will impact the structure and term of the deal.
Know the value of the equipment. We are not recommending an appraisal all of the time. Consult industry resources and experts to determine if the equipment cost on the invoice is in the right ballpark. This will help to avoid being significantly "under water" on the equipment and may help to avoid fraud. For example, a vendor can inflate the equipment price to give a kick-back to a customer or simply charge such a high price for the equipment that the deal does not make sense for the financing company.
Know the economic life of the equipment. The equipment may have a significantly shorter (or longer) life than equipment you have financed before. The State of Alabama may consider 20 year bonds to pay for computer tablets for students; but in our industry you cannot accept such a difference between the lease term and asset life.
Recognize when the equipment will have little or no value if repossessed. The equipment may be manufactured to meet the very specific needs of your customer or a small specialized market. It may be installed where you would have to tear out a wall to remove the equipment. It may be a type of equipment that people simply do not buy used. Rapid technological changes in an industry quickly make the equipment obsolete.
Know the dangers and risks associated with the equipment. If it is a type of equipment that could kill or injure someone, you may require more liability insurance than you would for typical equipment. If the equipment could carry or produce hazardous materials you will need to address the limits on its use and include special indemnity provisions in your lease documents. You may also elect to only finance the equipment though an Equipment Finance Agreement rather than a true lease so that your leasing company will be less likely to be sued in the event of an accident.
Know the maintenance needs of the equipment. If ongoing maintenance is important to the value and functionality of the equipment you may need to set out particular maintenance and return conditions in the lease. You may elect to require that the lessee have a maintenance contract with an approved provider and that the lessee keep a maintenance history log.
Vendors.
Even though it is not always possible to know a lot about the vendor, it is best to deal with established reputable vendors. Keep in mind, if you do not have a program agreement with the vendor, the vendor may have little, if any, duty to your company in a transaction.
Two examples:
One leasing company paid a vendor invoice for equipment that required customization for use by the lessee. The lessee never provided the required specs to the vendor. Rather than refund the money to the lessor the vendor applied the lease proceeds to other debt owned by the lessee. The lessee later bankrupted.
A client financed vehicles for a vendor's customers. The borrowers had questionable credit but the deals looked good because the vendor provided copies of checks from the customers showing significant down payments. Unfortunately, the down payment checks were bogus. The vendor had the customer make out the checks but never cashed them. Most of these risky borrowers quickly defaulted.
If you are dealing with an unknown vendor you may want to have a third party conduct an inspection of the financed equipment. However, keep in mind that even experienced inspectors can be fooled, for example, by fake serial numbers on equipment.
Sure, you can sue unscrupulous vendors. But who wants to spend their time chasing bad vendors when you could be chasing the next deal?
Remember This:
Equipment finance is essentially asset-based lending, focusing on the collateral as well as the borrower/lessee's credit. In that vein, be sure you understand your collateral before you lend against it and you will save your lawyer headaches and yourself money.
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