Thursday, 18 February 2016

Minimum term rental agreements

This morning I had a call from one of our funding partners, during which, amongst other things, our account manager asked for my opinion on minimum term rental agreements.

I told him that I couldn't honestly think of a single instance where they would be more suitable for a client than a fixed term agreement and that, to be brutally honest, I considered them a disgraceful practice by the finance industry.

Lease agreements are either for a fixed term, such as 24, 36, 48 months, or are for a minimum, "primary" term.

As a broker (and a neutral third party), at the end of a fixed term agreement, we are able to pass title of that equipment to our customer, the agreement then ends, the client owns the equipment and everybody is happy.

Under a minimum term agreement, the funder should write to the client 3 months before the end of the term, advising them of their options and stating that if they don't hear back from the client, that the agreement will trip into the secondary period and that the client will continue to make monthly payments until they notify the funder.

Of course, many companies never receive that letter (strange that!), and they are often completely unaware that they are they continuing to make payments for something for no good reason.

I have come across many instances of this (thankfully, none of which were agreements that we had set up), the worst of which was where a client was still paying, 5 years on, for an agreement that should have finished after 24 months.   This client had paid over £20,000 more than they needed to.

Of course most brokers and finance companies won't tell you of these horror stories.  Why ?   Because they share each and every secondary rental that the client continues to make.

At the Boss Corporation, we fund almost entirely on fixed term agreements and on the odd occasion where a funder does only offer a minimum term agreement, we make absolutely sure to explain this to the client and diary forward to remind the client to terminate the agreement. We do not have a single client currently paying secondary rentals and I am very proud of that fact.

I believe that more should be done to protect companies from these types of agreement and that new rules should be introduced, making it necessary for the client to sign something at the end of the primary period, acknowledging that they are entering a secondary period of rental and that they understand the other options available to them.

As I said at the start of this blog, I believe these agreements are completely unsuitable for almost all clients and they only favour funders and brokers in the finance industry.

I bet our account manager had wished he'd never asked....


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