Mike Caringi, owner of a small New Jersey business that sells pumps, found himself facing a gut-wrenching dilemma last summer. Should he continue paying $ 1,500 each month for essential telecommunications services he no longer receives and for leased equipment he claims was never installed? Or, should he stop making payments and face a potential lawsuit from the firm that financed the equipment under a ‘hell or high water’ lease? Mr. Caringi’s company is one of several thousand small companies around the country reeling from the bankruptcy of Norvergence, a reseller of telecommunications and Internet services. At the core of the quagmire facing Mr. Caringi and others is that Norvergence succeeded in getting customers to sign separate lease and service contracts that provided its services.
When Norvergence abruptly shut its doors, it left thousands of its customers scrambling to replace telephone and Internet services while they were obligated to shell out over $ 200 million in lease payments to Wells Fargo Financial, CIT and 30 other leasing companies over the next five years.
How can you protect your company from being victimized in a similar situation? Certainly, most transactions involving equipment leased in connection with a related service carry some degree of risk. You can reduce that risk by taking certain precautions. First, where possible, avoid leasing equipment when the equipment is proprietary to a service. The chances are that you will be stuck with the equipment if the service provider fails. Make sure that the leased equipment has an underlying value that justifies the lease. By doing a present value calculation of all payments owed under the lease agreement and comparing that value to the fair market value of the equipment, you can see whether the lease value is reasonable.
Check to see whether the equipment is used by similar service providers, in case you need to switch services. Finally, make sure you can resell the leased equipment in the after-market, if necessary. As a last resort, you may be able to cut your losses by having the ability to buy-out the equipment from the leasing company to be resold to someone else.
Perhaps, one of the best protections against getting stuck with service-related leased equipment is to thoroughly evaluate the service provider before proceeding. Make sure the service provider is financially sound and has a long track record of providing excellent service. If possible, ask for and review financial information on the service provider. Do an Internet news search to make sure there are no troubling stories about the service provider. Be partial to services that offer equipment under contracts that tie service and use of the equipment together, such that your obligation to pay is conditioned on the service being provided.
Lastly, since these transactions always carry some risk, make sure that an abrupt interruption in the service will not have a material negative impact on your company or cause financial hardship.