Leasing and Rentals
Merchantile Credit Managers are well trained to deal with how to manage the credit and collections of the transactions of selling of a product or services from one business to another. However, the Leasing or Rentaling of a facility or a piece of equipment deserves special consideration.
Title of goods sold moves from seller to buyer as soon as the goods are sold, regardless of whether the the buyer has paid for the goods or not. To reduce credit risk, credit managers can seek to register PPSA, if the goods can be serialized or easily recognizable as their product. Or, Corporate or Personal Guarantees or Letters of Credit can be obtained to minimize credit risk and bad debt, should the buyer be unable to pay, these other sources would then pay.
In Leasing and Rentals, a legal contract is drawn and executed by both parties and if necessary a PPSA is registered. Title of the asset remains with Lessor and does not pass to Lessee until paid for in full and the PPSA is relinquished. If a lessee does not pay, the lessor can repossess the equipment and take remedies for non-payment. In leasing, the lessor is responsible for the cost of maintenance. In rentals, the lessor is responsible for the maintenance and the length of the terms is normally shorter than a lease. Ie. A Lease may last 3 to 5 years or more, whereas a rental can be as short as a few days to a few months.
In the worse case scenario, a Bankruptcy, in the case of a Sale, the title has already been passed to the buyer, so any asset sold more than 60 days before Bankruptcy file date belongs to the buyer, therefore the seller can not ask for the return of the product. With Leasing and Rentals, the title remains with the lessor for rentor, and therefore they can request that the trustee of the bankruptcy return that asset to them, if there is no intention to continue to use and pay for the lease or rental.
In cases where the company leasing and renting equipment does this as a part of their normal business transactions, the lessee or rentee, may use the hold back of payment to obtain satisfaction to the use of the equipment/facility. To avoid such situations, many companies will set up a separate finance company that only leases and rents, thereby keeping the lessee from making such claims and hold back payments. This ensures that payments are made in a timely manner and all product claims must be made directly to the manufacturer. Slow payers are charged late fees and the consequences of not payment are more severe.
From the Sales perspective, a company offering leases and rentals can offer more units per monthly dollars available to the purchaser, thereby more units can be offered to the user. However, the down side is that there must be sufficient funds available to own the assets and the asset should not technologically age faster than the value of the asset over the term of the lease/rental.