Honestly, ask yourself these questions, answer them and you’ll be able to improve your lease portfolio:
- Which Assets Can Be Improved Upon?
- Which Agreements Are Too Long?
- Which Agreements Can Be Lengthened To Achieve More Value?
- Which Assets Should You Purchase Instead?
If you’re still unsure as to what these questions exactly mean and what the answers tell you, then let’s take a deeper look into each.
How To Spot Which Assets Can Be Improved Upon
The main reason for leasing an asset, at the beginning of an agreement, is because it’s an affordable way of acquiring cutting edge, premium assets, without paying the full ticket price like if you were to purchase them outright.
But when your agreement has been ticking over for a certain period of time, what state is the asset in? Is it still cutting edge?
Not in terms of “is it still the latest model”, that will be something decided by your lease agreement terms and conditions, but is it still as productive as when you first acquired it?
If your branding and service dictate that you’re a premium option who deliver the ultimate, industry leading service, do your assets let your team achieve this? Ask yourself - does the IT hardware in your office still perform as efficiently and effectively as possible?
If any of your leased assets aren’t working as well as they once were, on any level, speak to your supplier about what can be sorted. This answer could be that they’re due an early service or parts upgrade, or your supplier might be able to offer a superior alternative for a similar payment amount.
Spotting Agreements Which Are Too Long
The benefit of signing up for a lengthy lease agreement is two-fold: whilst the lessor has certainty that their asset is out on lease and the longer a customer has it the more likely they are to purchase it, the lessee will have been able to negotiate a more favourable payment amount as a result.
However, from the lessee’s, point of view, it’s worth taking a look to see whether any existing agreements are too long. All markets are constantly changing. Technological advances, economic climates and new players mean that, although it was the right decision at the time, the fact your business signed up to a very lengthy agreement might now be impractical and inefficient.
The legal agreement may be hard to break, but if one of your predecessors has signed a deal which is now completely unreasonable, it might be worth investigating what options you have. These could include cutting your losses and buying yourself out the agreement via purchasing the asset or by negotiating new and improved terms, for both parties, with your lease or equipment provider.
And Look At This The Other Way: Spot Lease Agreements Which Would Be Worth Lengthening
On the flip side to the previous point, you may have some lease agreements in place which will be worth lengthening.
If for example, you have a large piece of plant or machinery which is still catering for all of your business’s needs - it’s still wholly productive, there’s minimum downtime, it’s treating you well - but it’s no longer a prime asset or marketable to sell, your lease provider may be more than happy to extend your agreement or even sell it to you at a cut price.
Think of it this way, if your brother-in-law has a banged up looking old car which you know works perfectly fine, you’d be happy to buy it if you aren’t bothered about having a modern model. But it won’t be worth selling on the open market.
You’ll get to keep the reliable old workhorse which your staff know inside out and your lease provider gets a potential problem taken off their hands.
And Which Assets Should You Purchase Instead?
The age-old question is to decide which assets you should purchase rather than lease.
Here’re some checkpoints which should signal whether you should purchase or lease the asset which is approaching the end of its agreement term:
- Can you take out a financially favourable extended warranty?
- Is it performing well enough as a production driving asset to warrant taking ownership?
- Purchasing the asset will mean removing the flexibilities and lack of responsibility for the asset you enjoy via leasing - can the business cope with having the value of the asset tied up within it until it can make a sale?
- And how easy it will it be to sell the asset once you need to?
- And Is extending the lease agreement fully costed and thought out? Until you have done this, there is no point making any sort of comparison. An extended agreement should always be more favourable than the existing one or a cold, fresh one.
You need to weigh up the answers to all of these questions in regard to the particular assets in questions and your own business circumstances.
The decision you make will need to form part of a wider business strategy. To illustrate how leasing can shape the direction of a company, look at two of the most recognisable in the world: DHL and McDonald’s
DHL contracts their freight vehicles and lease warehouses en masse in order to stay fluid, but McDonald's buy land and lease it to franchises of their own brand in order to make the best use of its money.
This shows what scope there is for using leasing to your business’ benefit. But, more importantly, just what options you have when it comes to making leasing work for you.
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