Equipment Leasing requires credit worthy customers (the lessees) to lease equipment that is purchased on their behalf by a third party leasing company (the lessor). There are always at least three parties in a lease: the seller; the buyer or lessor; and the lessee or user of the equipment. Of them, only the lessor and the lessee are singular. Each lease may have several sellers. And each lease hinges on the credit qualifications of the lessee.
In each credit decision one must look at the type of equipment, the term of the lease, the dollar magnitude of the subject to be leased, the credit worthiness of the lessee, the collateral available to the lessor in the event of default, and the remedies available to any creditor.
The term of the lease is important because it establishes the size of the periodic rent lessee payments. Usually these payments will be keyed on a premium above corresponding treasury notes for like term. The premium will usually be a spread that conforms to what rating agencies would price rated credits in their respective rating guides. Typical agencies are Standard & Poor and Moodys. The rents will be calculated on a monthly, quarterly, or semi-annual basis as is customary to the particular industry. The rent payments will be due periodically in advance or arrears. The payments will be based on an assumed interest rate. The periodic rent will be reviewed in the context of the lessees ability to pay over time.
The dollar purchase price of the equipment is the base principal upon which the lessor will establish its rent payments. In some instances, the lessor will assume a significant residual and in other cases a modest one, and in others, none at all. Each will result in lower to higher rents respectively.
The credit worthiness of the lessee will be based on the following:
- Dun & Bradstreet publishes information on most lessees. From it one can find out aboutsome of the lessees payment habits, whether there are tax liens or other liens or judgments. It publishes a Paydex, a payment history index that establishes a rating for the lessee and other credit agencies.
- S&P and Moodys for investment grade and some lower rated companies.
- When companies are closely held thepersonal FICO scores of the companys principalswill be reviewed.
- Audited Statements are normally required to assist in the credit approval process when a thorough understanding of a companys assets and liabilities are complex and the operating statement can furnish support for the further encumbrance of a lease obligation.
- Reviews and Compilations may be satisfactory in the smaller lease regimes. They are also prepared by public accountants but do not have the authority of their certification.
- Finally, the collateral itself is important as the subject matter of an ultimate case in extremis. The creditor wants to know that if the lessee defaults, it will have recourse to the underlying asset of the lease. The Remedy section of every lease lays out the process of asset recovery.
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