Re-Negotiating an Equipment Lease Near the End of the Term

Is it worth trying to modify the payment schedule in the late months of a long lease of shop equipment? June 7, 2011

Has anyone had luck renegotiating equipment leases? We have a lease with a $1 buyout at end. 18 more payments at $3200 for our CNC and some other equipment. We are crunched like everyone. Has anyone negotiated better terms towards the end of a lease like this, or even a lump sum to end the lease? I was thinking of telling them to come pick it or help us with a better deal - I figure the last thing they want is another repossessed CNC. Any thoughts?

Forum Responses
(Business and Management Forum)
From contributor G:
Certainly in these times we need to be wary of all costs. I just read about a business owner who took the time to ask all of his vendors (utilities and landlord included) to renegotiate terms and costs. The end result was about 30% reduction on his monthly overhead costs. Obviously this tactic won't work for everyone to this extent. But it couldn't hurt.

I think it's also important to remember that all equipment dealers are also businesses. They are also feeling the effects of this economy. Instead of gambling that they won't take back your machine, why not negotiate with them? Is there something else that you're getting for your payment besides the machine? Perhaps a service agreement? If so, maybe you can suspend the service agreement until you can again make the original payment amount.

From contributor S:
Somehow when you play chicken, the car always wins, and it's not so good for the chicken!

What is the used market paying for the CNC you have? If you have 18 months left to pay on it, I an guessing you have already paid over 2/3 of it. If you owe $60K, and the used price will bring more than that, attempt to work out a 3 way deal to sell it to another party, or get someone else to take over your lease. Maybe you can get another shop locally who is interested in a time share program.

Trying to pressure the lease company into reducing the price (short sale type of thing) will probably not interest them unless you are behind in your payments. Why would they want to cut their profits unless you are behind and likely to default, by which time they will already have reported you to the credit agencies? Any type of deal other than payment in full on time will likely show up on your credit and when things turn around, you can kiss off any chance of a good lease or loan so long as the deal stays on your credit report.

Unless you are normally in a position to pay cash for most of your purchases, including materials, now is the time to really protect your credit standing. Banks hardly want to loan money to people who don't really need it, and I don't foresee loose credit for a long time to come.

A lease with a $1 buyout is really a purchase contract with some additional tax benefits. You may be able to negotiate a complete buyout by paying the principle amount still outstanding, but I think that this far into a lease, it is going to be close to the total of the remaining lease amount. And talk to your accountant - a buyout may have IRS or even local tax implications. An early buyout would probably save your credit standing or even improve it.

From contributor G:
One other thing - are you making any money with this machine? You seem to be very willing to give it up. If you aren't making money with it, then you need to find out why. This machine should be an asset to your shop, not a liability. If you can't keep it running long enough, find other work for it through other shops, etc.

From contributor M:
If your current business is keeping the machine busy and you anticipate improvement, look into a new machine with your old one as a trade. You may be able to get improved technology, a better lease agreement, and tax advantages of accelerated depreciation.

From contributor K:
The leasing company made their interest in the beginning, and unless they are in the position of having to take your CNC back, they will avoid it at all costs, while hitting you up for more fees. They may even rewrite the note because they can get more interest out of you. They are in the money-renting business, not the collection of assets business. It hurts their credit rating if they repo too many assets.

But I want to encourage you to look at this another way. You are only 1 1/2 years away from being able to save $3200 per month, almost $40K per year, and you will own your CNC. Unless someone can show how a new CNC can increase your productivity so much by upgrading your CNC to the newest technology that it will negate this almost $40K that you can now put away instead of give away (not to mention the increased payments on the new technology), you should absolutely keep your CNC and realize the benefits.

Just think, in 1 1/2 years, you will be able to breathe and reduce your stress each month not having to come up with that $3200, and rather saving it each month, which you can use to buy outright your next CNC, with a trade... for cash (assuming you actually save the money).

You are so stressed over making this payment that you are willing to just give it to the finance company after they made all their interest, and you are almost at the point where it will really start to pay off. You have the opportunity here to break this financing cycle.

Instead, contact local shops who do not have a CNC, and become their source for CNC'd products. Meet them in person, show how you can increase what they offer their clients, with the ability to offer pretty much anything they can think of. Once you have your first shop or two online, use them as success examples for additional shops.

You bought that CNC because it could accomplish certain things for you. Guess what? Those things translate to these shops, but they don't have it to use... until now. Show how you can rip a whole kitchen's worth of cabinet carcasses while they are prepping the doors and frames to get things out the door quicker, thereby increasing their net profit. Offer an additional assembly option. After all, you can say, the artistry is more on the outside, not on the inside. Have them think of you as a really important employee with awesome tools that they can use whenever they need to, and don't have to worry about paying taxes or insurance for, nor do they have to worry about laying you off when they don't have the business.

Then think outside the box. Talk about how with your CNC services, you can open up a different level of products to them to be able to offer their clients and profit from it at the same time. Find ways to keep that CNC running.

I want to encourage you to keep your eye on the ball here and not get lost in the negativity of the situation. Instead, place your focus on the fact that while you are ramping up ways to more broadly market the use of your CNC, in a short 1 1/2 years, you will reap the benefits of new market share and a savings of almost $40K per year.

Get on the CNC Forum on this site and start asking others how they overcame this challenge, and how they were able to keep their CNC running. Be proactive. You can do it. And like Henry Ford said, "whether you think you can or you think you can't... you're right!"...

From contributor G:
Well said!

From contributor P:
Nice post.

From contributor J:
Call it "extend and pretend." You'll pretend that it's still worth what you bought it for, and they will extend the payment plan to reduce your monthly hit.

From contributor C:
I had the same situation first of last year. Same machine, same dollars. I got a little behind and negotiated a 90 modification to pay interest only. I really only got about a month of benefit from it because I was 2 months behind already. I tried to stay with it but ultimately wound up 5 months behind a year later, and lost the machine anyway. I haven't heard a word about it since the day they picked it up in late Feb. Someone told me that depending on the terms of the lease, they will come after me for the entire amount of the original lease rather than just the balance owed, plus all the costs. Good luck with that!

We were only using the machine to make thermofoil doors and use cell manufacturing on the box parts. The doors had fallen way off and it just didn't make sense to try to keep it. When I look back, I wish I had let it go sooner - I would be $30,000 better off today. Preserving your credit rating seems like a pretty small thing when you're fighting to hang on and just survive at all costs.

I guess the bottom line is whether the machine makes money and justifies itself or not. 18 months is an eternity when you can't keep up with it. Mine was only running about 10 hours a month in the end. Seems like every thermofoil door I made ended up getting remade, at least twice. I'm glad to go back to outsourcing. We didn't have that problem when we made a lot of them. It just seemed like the less we did, the worse it got.

From contributor K:

Sorry to hear things went south for you. But you are right, at some point, they will most likely come after you for the balance.

"I'm glad to go back to outsourcing."

That said... The questioner needs to make his CNC more productive, and you are now without a CNC and looking to outsource. Sounds like a potential match. Shoot him an email - I'm sure there are plenty of ways you two can work together in addition to just doors and boxes.