By far the most popular way of acquiring your machine is to lease.
In days gone lease contracts had a reputation of being extremely one-sided, and indeed, some unscrupulous operators developed contracts that were of dubious ethical standards, to say the least! I’m pleased to report that the situation is very much different these days, and the rogue operators and dangerous contracts are long gone.
This is largely due to the excellent efforts of the Finance and Leasing Association, whose members have tightened up their act to a remarkable extent. Lease Agreements these days are written in plain English and you are urged to read and re-read the Agreement before entering into an Agreement. There ARE still pitfalls, but a little attention to detail will ensure a smooth ride.
how do leases work?
OK. You’ve decided upon the machine that you want. You have decided you’d like to keep your capital in the business and you’d like to spread the cost.
Coffee and vending companies almost always use third party leasing companies. Even if the company has personalised leasing documents, the finance is likely to be brokered through a major leasing company.
The first thing you need to decide is how long you would like the lease to last. Leases are available over one year up to six years. Naturally, the longer the lease, the lower cost. These days, a properly maintained machine will easily last well over six years, which is about the longest lease available, so if you are looking to pay as little as possible, the longer the lease, the better. The most common leases on equipment these days are of three to five years duration. It is not uncommon for the sales person to ask for a down payment which will be taken from the cost of the lease.
Having decided upon the duration of the lease the salesperson will tell you how much this is going to cost. He does this by taking the capital cost of the equipment and multiplying it by a rate per thousand which his company has been given by the leasing company. Lease rentals are usually payable quarterly in advance and by direct debit. Monthly payments are also available. Having gained your approval the sales person will then propose your document to a Leasing company. If you have a good credit record and have been trading for over three years, you should have no problem in being accepted.
If you have been trading for less than three years, or have a poor credit record (County Court Judgements etc.,) it is unlikely that you will be accepted by the Leasing company. Upon acceptance the vending company will then make arrangements to either order or (if they have it in stock,) to install your machine. Once the machine has been installed and is working to your satisfaction you will be asked to sign a declaration which states that you have received the equipment specified on the agreement, that it is working to your satisfaction, and that the lease may commence.
Upon presentation of this document to the leasing company, the supplier will be paid in full for the equipment. Your contract, for the finance of your machine, is then with the Leasing company. The first lease payment will be taken from your bank within a few days and thereafter monthly or quarterly in accordance with the Agreement.
But why lease?
Leasing is a tax efficient method of financing your vending machines.
It saves working capital. If you buy your machine outright, your money invested becomes tied up in a depreciating asset. This means it cannot be used for other things. Leasing enables you to save your money for other projects, or unexpected situations which may arise. Payments made on Lease Agreements are not subject to interest rate changes. Your costs are fixed for the duration of the lease. Only a change in the rate of VAT can affect your repayments. If you pay Corporation Tax, leasing can be really attractive. Leasing payments can be deducted from taxable profits, thereby reducing the net cost of the lease payments.
A world -famous businessman once said “BUY that which appreciates in value, LEASE that which depreciates in value.”
Lets say you have two years to go on your lease and for whatever reason you decide you would like a different machine. Beware of the salesperson who says “We’ll pay that off for you” because this usually is not the case. What really happens is as follows.
You receive an upgrade figure from the leasing company of, say, £1600. (The Leasing company will make a small discount on the outstanding repayments if you are upgrading.) The upgrade figure is then added to the capital cost of your new machine, and the repayments are calculated using the rate as before. Upon completion, that is, when your machine is installed, and you have signed your acceptance, the original Agreement will cease to exist and the new one will take its place.
In the event that the new agreement is with a different finance company, you would receive a settlement figure from your existing lease company (this is usually a little higher than an upgrade figure) this is then added to the capital cost and the rate applied as before. The difference is that upon completion, you will receive a cheque from either the supplier or your new lease company for the full settlement figure (plus VAT) to send to your original leasing company. Occasionally this is sent directly from one lease company to the other.
Avoiding the pitfalls!!!
Check the number of payments. A straight forward lease will be for a fixed term. A three year lease will be 12 quarterly payments or 36 monthly payments. In order to make the repayments appear lower, some companies offer 39 month agreements, or 13 or even 14 quarterly payments! This is not illegal, or even unscrupulous provided that you are made aware of this before signing the agreement. If in doubt, ask the supplier to put in writing how many payments you will be expected to make. When comparing repayments check that all prospective suppliers are quoting for the same number of payments. Even better, decide on the number of payments you wish to make, and insist that all quotations comply.
2. Check that you understand the agreement and that a copy has been left with you after it has been COMPLETELY filled in and you have signed. If you have been made promises by the salesperson which are outside of what is stated on the paperwork – get it in writing, preferably signed by a senior manager or director of the company.
3. Read the agreement carefully.
4. Make absolutely certain that the agreement corresponds EXACTLY with what you have agreed either verbally or in a quotation from the salesperson.
Remember, once the agreement is in place, your finance contract is with the lease company, and any disagreements you may have with a salesperson, may be difficult to overcome.
5. Ask how long the salesperson has been with the company, or in the industry. You may be accepting his recommendations, when he has little more knowledge than you! If he is new to the business, ask to speak with a manager or director to check the information provided.
6. If, for any reason, a mistake is made, and you have to sign a new agreement, make sure that the details are exactly the same as the previous agreement. Rental agreements The main difference between a lease agreement and a rental agreement is that with the latter, the agreement is with the coffee or vending company.
Rental Agreements are usually for a shorter duration, are often for refurbished or reconditioned equipment, and are sometimes more restrictive and harder to get out of than leasing agreements!
For example, some companies have clauses in their rental agreements that would prevent you having any similar equipment on your premises from any other company. This means that if you are looking to have additional machines, but you are unhappy with the service of the existing company, you cannot rent machines from another company until the existing rental agreement has expired.
Unlike Lease Agreements, Rental Agreements are usually not fixed term and will continue until you give notice, so make a note of the expiry date…just in case!
Remember your lease agreement is ONLY to finance your equipment. It is NOT for cleaning, replenishing or maintenance.