There’s good news for manufacturers and commercial equipment leasing companies: The Equipment Leasing and Financing Association recently reported a strong start to 2019 with leasing volume in January up by 4 percent over the prior year. Nonetheless, the increased business activity underscores the ever-present need for equipment leasing companies to protect themselves from the financial consequences of potential defaults by their lessees.
The solution: Commercial equipment leasing companies might consider requiring an equipment lease surety bond from their pending lessees as a term-sheet requirement. Indeed, many commercial manufacturers that sell and lease equipment directly to end-users or wholesalers – and individual commercial companies leasing one or more of their owned pieces of equipment for 12 months or longer – may require these bonds.
How the bonds work.The lease payment surety bond guarantees the faithful performance of the lease in the event the lessee defaults on the terms and conditions of the lease contract. If the lessee defaults on the terms and conditions of the lease contract, the surety carrier that issued the surety bond to the owner or lessor of the equipment will assume the responsibilities of the lease, paying whatever is stipulated as penalty for lessee default. These penalties may include the actual lease payments and liquidated or consequential damages.
Lessors have flexibility.The bond premium must be paid at the time of issuance. Lessors often finance the premium and add it to the monthly lease payments, especially in a multi-year transaction. A penalty sub-limit is established and becomes the total amount that can be collected from the bonding carrier in the event of a total default.
Transparent lease contracts are key. As with any surety bond, the key for an effective equipment lease payment bond is to make sure the lease terms and language are unambiguous and transparent as possible to assure the rights of the lessor. In this case, working with an experienced surety agent familiar with lease payment bonds, such as Unique Surety and Insurance Services, LLC, is essential.
The value of an experienced surety agent.Unique Surety can work with all parties involved in the lease transaction to help them manuscript mutually acceptable language. The credit-worthiness of the lessee greatly influences the probability of issuance and may affect the premium rate structure of the bond.
Qualifying for bonding. Besides demonstrating their ability to make the lease payments and satisfy other provisions in the lease contract, lessees will be required to submit a business plan, two years of financial statements (preferably audited), their resume, and bonding application to their surety agent to begin the process.
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