In 2003, venture capitalists and investors dispensed over $18 billion to promising young U.S. companies, according to VentureOne and Ernst & Young Quarterly Venture Capital Report. Less documented and reported is venture leasing's activity and volume. This form of equipment financing contributes greatly to the growth of U.S. start-ups. Yearly, specialty leasing companies pour hundreds of millions of dollars into start-ups, permitting savvy entrepreneurs to achieve the biggest 'bang for their buck' in financing growth. What is venture leasing and how do sophisticated entrepreneurs maximize enterprise value with this type of financing? Why is venture leasing a cheaper and smarter way to finance needed equipment when compared to venture capital? For answers, one must look closely at this relatively new and expanding form of equipment financing specifically designed for rapidly growing venture capital-backed start-ups. The term venture leasing describes the leasing of equipment to pre-profit, start-ups funded by venture capital investors. These companies usually have negative cash flow and rely on additional equity rounds to fulfill their business plans. Venture leasing allows growing start-ups to acquire needed operating equipment while conserving expensive venture development capital. Equipment financed by venture leases usually includes essentials such as computers, laboratory equipment, test equipment, furniture, manufacturing and production equipment, and other equipment to automate the office.
To help me understand why I was hearing the reluctance on the part of the leasing company executive, I began asking probing questions to determine if he felt our customer had not fulfilled the terms of the lease contract. I quickly confirmed that all the lease's provisions had been followed to the letter. The real problem was that the leasing company expected their leases to renew for at least one additional renewal term. The leasing company executive admitted that their business model incorporated them receiving the additional revenue of at least one renewal term. Their residual position (what they expected to receive by selling the equipment to someone else) was set expecting this additional revenue. If they didn't receive the renewal revenue, their profits were off (low) for that transaction.
I asked the executive how they could be so sure that equipment would go into renewal. Without hesitating, he answered because historically most of their equipment leases do. After getting up off the floor, I asked his opinion why that many leases went into renewal. He replied that it was either the lack of tracking the lease expiration or turnover in the customer position that was responsible for notifying the lease company in a specific time frame (designated within the lease agreement). The majority of copier leases are written for a 5-year lease term. Turnover (either promotions or by leaving) within a customer's business does usually occur before the end of the lease. In addition, during the course of busy days at the office, no one stops to document lease expiration dates. It seems so far away and therefore unnecessary at the time.
The lease's duration and base rent are of primary importance to the commercial tenant. Usually, a commercial lease is for a term of 5 to 20 years with fixed escalations in base rent or escalations based on an economic index, like the consumer price index. Also, the tenant may be offered options to extend the lease term or expand into adjacent or other areas of the property. Depending on the property and the landlord, lease term and base rent may be negotiable. As a general rule, the larger the space tenant intends to occupy, the greater the flexibility the landlord will show in negotiating provisions in the lease. However, if a property enjoys a high occupancy rate, a landlord will be less likely to show leeway in negotiating the economic terms of the lease. Yet, I am reminded of two great adages of the commercial world: (1) everything is negotiable; and (2) if you don't ask, you won't know. Also, a tenant should take care to read and understand the description of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a number which is usually larger than "usable square feet". The tenant's rent and responsibility for reimbursement of pass-throughs (CAM, taxes, insurance, utilities, etc.) are normally based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to execution of the lease, or the tenant could face unforeseen costs or potential litigation.
The primary reason you don't want your lease to renew is that you are being forced to pay new equipment costs (i.e. the same lease payment) for your old and well used equipment. In essence, you have no options. In contrast, if you don't get snagged by the lease renewal, you can always lease more highly featured and productive equipment for the same or lower cost. Another available option is to release your same equipment (assuming it has been working well) for a shorter term at a significant discount. There has been some backfiring of this intentional upgrading plan when customers are so infuriated by the renewal that they refuse to work with either the equipment vendor or the leasing company. As a result, there has been a softening of some of the stringent requirements. You have to check the verbiage in your current lease agreement in the section labeled something like "End of Lease" or "Renewal" to determine the expiration criteria.
Satisfied that the business model is sound, the venture lessor's greatest concern is whether the start-up has sufficient liquidity or cash on hand to support a significant portion of the lease term. If the venture fails to raise additional capital or runs out of cash, the lessor is not likely to collect further lease payments. To mitigate this risk, most experienced venture lessors pursue start-ups with at least nine months of cash or sufficient liquid assets to service a substantial portion of their leases.
To help me understand why I was hearing the reluctance on the part of the leasing company executive, I began asking probing questions to determine if he felt our customer had not fulfilled the terms of the lease contract. I quickly confirmed that all the lease's provisions had been followed to the letter. The real problem was that the leasing company expected their leases to renew for at least one additional renewal term. The leasing company executive admitted that their business model incorporated them receiving the additional revenue of at least one renewal term. Their residual position (what they expected to receive by selling the equipment to someone else) was set expecting this additional revenue. If they didn't receive the renewal revenue, their profits were off (low) for that transaction.
I asked the executive how they could be so sure that equipment would go into renewal. Without hesitating, he answered because historically most of their equipment leases do. After getting up off the floor, I asked his opinion why that many leases went into renewal. He replied that it was either the lack of tracking the lease expiration or turnover in the customer position that was responsible for notifying the lease company in a specific time frame (designated within the lease agreement). The majority of copier leases are written for a 5-year lease term. Turnover (either promotions or by leaving) within a customer's business does usually occur before the end of the lease. In addition, during the course of busy days at the office, no one stops to document lease expiration dates. It seems so far away and therefore unnecessary at the time.
The lease's duration and base rent are of primary importance to the commercial tenant. Usually, a commercial lease is for a term of 5 to 20 years with fixed escalations in base rent or escalations based on an economic index, like the consumer price index. Also, the tenant may be offered options to extend the lease term or expand into adjacent or other areas of the property. Depending on the property and the landlord, lease term and base rent may be negotiable. As a general rule, the larger the space tenant intends to occupy, the greater the flexibility the landlord will show in negotiating provisions in the lease. However, if a property enjoys a high occupancy rate, a landlord will be less likely to show leeway in negotiating the economic terms of the lease. Yet, I am reminded of two great adages of the commercial world: (1) everything is negotiable; and (2) if you don't ask, you won't know. Also, a tenant should take care to read and understand the description of the premises contained in the lease. Most commercial leases are based on "rentable square feet", a number which is usually larger than "usable square feet". The tenant's rent and responsibility for reimbursement of pass-throughs (CAM, taxes, insurance, utilities, etc.) are normally based on the rentable square feet of the premises. Discrepancies in square footage and boundary lines should be resolved prior to execution of the lease, or the tenant could face unforeseen costs or potential litigation.
The primary reason you don't want your lease to renew is that you are being forced to pay new equipment costs (i.e. the same lease payment) for your old and well used equipment. In essence, you have no options. In contrast, if you don't get snagged by the lease renewal, you can always lease more highly featured and productive equipment for the same or lower cost. Another available option is to release your same equipment (assuming it has been working well) for a shorter term at a significant discount. There has been some backfiring of this intentional upgrading plan when customers are so infuriated by the renewal that they refuse to work with either the equipment vendor or the leasing company. As a result, there has been a softening of some of the stringent requirements. You have to check the verbiage in your current lease agreement in the section labeled something like "End of Lease" or "Renewal" to determine the expiration criteria.
Satisfied that the business model is sound, the venture lessor's greatest concern is whether the start-up has sufficient liquidity or cash on hand to support a significant portion of the lease term. If the venture fails to raise additional capital or runs out of cash, the lessor is not likely to collect further lease payments. To mitigate this risk, most experienced venture lessors pursue start-ups with at least nine months of cash or sufficient liquid assets to service a substantial portion of their leases.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Before You Get A Pay Day Loan You have full permission to reprint this article provided this box is kept unchanged.
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