Dodging Leasings Grim Reaper: Navigating a Payment Default
In her third Harry Potter novel,?The Prisoner of Azkaban?, J. K. Rowling introduces a silent mysterious clan of spiny, cloaked creatures capable of siphoning off happiness and all good thoughts from anyone in their presence. Extended exposure to these scabby grim reapers, called Dementors, resulted in madness or death for even the most joyful individuals. In the world of equipment leasing, the closest things to Dementors are lessors who lose confidence in defaulting lessees. If your firm faces imminent payment default, there are several actions you can take to improve your chances of navigating this unfortunate situation.
As a first step, you should notify the lessor when a payment default seems unavoidable. No one wants to be blindsided by an unexplained delinquency as the first indication of a problem. Most lessors will appreciate your forthright candor in alerting them. Be prepared to give an explanation of the cause of the payment problem, a detailed account of your company? s financial condition, and your plan to correct the situation. If you are able to generate financial projections, they will prove helpful in convincing the lessor to allow you to execute your recovery plan.
Try to stay in compliance with all other terms and conditions of the lease. Most lessors will appreciate your diligence in adhering to the other lease provisions, especially those requiring periodic financial information. Frequent updates will give the lessor confidence that you are cooperating and working with him.
If appropriate, propose a rent reduction in an amount and for a term that will give you an opportunity to recover. Remember, the lessor is primarily interested in how the lease will be repaid and how he will realize the benefit of the bargain negotiated at the outset of the lease. Secondly, he is concerned about his collateral position. Now that a problem has surfaced, he will want protection from a loss on the transaction if your company fails or if equipment repossession becomes necessary. Offer cash flow projections to show how your firm will recover and when you will be able to resume making full rent payments.
If possible, be prepared to offer credit enhancements and an increase in the lease rate to entice the lessor to accommodate you. Credit enhancements are intended to make the lessor feel more secure that he will recover his investment. You may offer additional collateral, a personal guarantee, a pledge of stock or other securities as credit enhancements. To compensate the lessor for the added risk of the defaulted transaction offer a rate adjustment. A rate adjustment might be accomplished by extending the lease term, stepping up the rental after resuming payments, or issuing warrants to purchase stock in your firm.
If you can? t determine the likely duration of the default, you should request a relatively short period of lower payments until you can better evaluated the situation. Be prepared to negotiate the length of the period, the amount of the reduced payments and credit enhancements.
George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (?LTI?), responsible for LTI? s marketing and financing efforts. A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.