Forklifts and fine print

If they haven’t already, it’s time for small and medium-sized businesses to take a hard look at how they acquire forklift fleets. Finance partners have responded to customer demands for more nuanced and cost-effective options.

“It’s important to always try to be as educated as you can because there are certainly some ‘gotchas’ in leasing that have rubbed people the wrong way,” says Chris Lewis, senior manager for Summit Funding Group. “Larger companies know all those details before they sign on the dotted line, so it’s more critical to middle market operators out there.”

Many such companies would finance over a certain term and incur additional costs to keep equipment up and running, Lewis says. However, advances in machine telemetry and technology improvements have helped operators understand how, when and where they’re using equipment.

“Now when they commit to an operating lease because of increased technology advances, they begin to peel back the layers of the onion to understand their tactical position and what they’re actually trying to accomplish,” Lewis says. “We see more hybrids of operating and capital leases for accounting purposes, or leases with shorter or longer terms. We can even finance software packages into equipment, for example. There are continued advances where software and other technology is driving the equipment’s efficiency, which is always something we’re happy to include in a lease.”

Lewis notes that operations and finance departments work far more collectively than in the past, enabling them to approach a capex purchase or lease strategy together. Larger companies with dedicated programs are very sharp, Lewis says, and know how to do analysis, know the OEMs, and know who they believe is best for their business. For them it comes down to numbers; they’re looking for the most cost-effective choice. The lower and middle markets need more education, Lewis says—especially if they have historically owned equipment and have mechanisms to manage and maintain that equipment.

A thorough understanding of return provisions is key. “You have to be sure to adhere to the back-end criteria, because you can get tangled up in there,” Lewis says. “Maintaining equipment properly is very, very critical to total cost of ownership or total cost of an operating lease.” The trouble is in the fine print, he adds. Understand what you’re getting into in terms of returns, usage, machine quality and “really get your head around that.”

If you’re estimating you will be using equipment X amount but it ends up being X+, it can get expensive. For folks intending to purchase and need equipment off the balance sheet, Lewis advises establishing a fixed buyout at the end of term. Some auditors won’t qualify that as an operating lease, he says, but if they know they will want to own it, it’s always prudent to know what percentage of the original equipment cost it will be.

“If I’m looking at it from an operations perspective and I need to acquire a fleet, I would have to say we’re in the middle of a paradigm shift right now because of technology and automation,” Lewis says. “I don’t think we’ll see anything massive in the next five years, but in 10 to 15 maybe we have completely automated forklifts. Maybe the manned forklift faces obsolescence. Today, that won’t make me choose one strategy or other, but if and when that reality approaches, an operating lease will be more attractive.”