In the course of your operations, if a lessee insists on off balance sheet financing, you must first of all ensure that the lease does not meet any of the 5 criteria including:
i. Automatic ownership transfer
ii. Bargain purchase option
iii. Lease term equal to or greater that 75% of the asset’s economic life
iv. Present Value of minimum lease payments equal to or greater than 90% of equipment cost
v. Special purpose equipment
vi. Techniques to achieve off balance sheet financing structuring
- Higher discount rate – Note the rule “higher the discount rate, lower the present value”.
- Lower rental with higher residual – This is up to you, The important point here is to compute the break even residual amount that accommodates a lower rental.
- Inclusion of a refundable security deposit – A refundable security deposit is not a minimum lease payment, it is an asset in your books. You are able to reduce the rental on the lease given the fact that you will earn interest on such deposit for the entire duration of the lease.
- Early termination options (ETO) – This option will provide you with flexibility in deciding at a point in time during the lease or otherwise whether to exercise the option of paying an ETO fee to terminate the lease and return the equipment to you.
- Structuring the lease – This means arriving at a non linear rental stream, generally step up or step down. Proper structuring will lower present value, the key is to know whether such is to be a step up or step down structure
- Shorten the lease term – this depend on the new rental amount which in turn depends on what your residual value will be at the end of the new term.
- Vendor arrangements – If a vendor is willing to guarantee a part of your residual, you can lower the rental to arrive at a lower present value. Another way is to arrive at extended payment terms to the vendor
Therefore, It is expedient for operators to perfectly understand the operational dynamics of this business model and learn the secrets to succeed as a lessor. Learn from the experts and learn from the best. Visit the Secretariat or call 08023176691, 08023179048, info@elannigeria.org for further engagements