For many Small and Medium Enterprises (SMEs) in Nigeria, leasing provides a convenient solution for accessing the machinery, vehicles, and equipment needed to grow their businesses. It helps businesses preserve capital and plan their budgets more effectively.
However, leasing is not without risks, and without proper planning, businesses can find themselves locked into unfavorable agreements. Here’s a look at some common leasing mistakes Nigerian SMEs should avoid, along with tips on how to navigate the leasing process successfully.
Not Understanding the Terms and Conditions
- Mistake: One of the most common mistakes SMEs make is failing to fully understand the leasing agreement’s terms and conditions. Important details like interest rates, lease duration, maintenance obligations, and payment schedules can be buried in fine print.
- How to Avoid: Always take time to read through the whole lease agreement and seek clarification from the leasing company on any confusing terms. If needed, consult a legal advisor to ensure that you are clear on your obligations and rights under the lease.
Choosing the Wrong Lease Type
- Mistake: Leasing comes in different forms, such as operating leases and finance leases, and choosing the wrong type can be costly. For instance, a finance lease might be more suitable for equipment you plan to use over a longer term, whereas an operating lease may work better for short-term needs.
- How to Avoid: Understand the differences between lease types and match them with your business’s needs. Consider factors like intended duration of equipment use and whether you plan to purchase the asset at the end of the lease.
Choosing an Unreliable Leasing Partner
- Mistake: Partnering with a leasing company that has a history of poor service or hidden charges can result in a negative leasing experience.
- How to Avoid: Perform thorough research before choosing a leasing partner. Check reviews, ask for references, and verify the company’s track record with other SMEs. Choose a company that is transparent, reliable, and has a good reputation in the industry.
Not Negotiating Lease Terms
- Mistake: Many business owners believe that lease terms are non-negotiable, missing out on potential savings and better payment structures.
- How to Avoid: Always try to discuss and negotiate lease terms. This could include lower interest rates, extended payment terms, or a better purchase option at the end of the lease. Leasing companies often have room for flexibility, especially if you have a good credit history or are leasing multiple items.
Ignoring the True Cost of Leasing
- Mistake: Many businesses get fixated on the monthly lease payments but forget to consider the total cost of leasing, which includes interest, insurance, maintenance, and potential fees for late payments.
- How to Avoid: Request a breakdown of all costs from the leasing company before signing the agreement. Calculate the total cost over the life of the lease and compare it with the benefits the equipment will bring to your business. This way, you can make an informed decision.
Not Aligning Lease Terms with Business Needs
- Mistake: A common mistake SMEs make is signing a lease without considering whether the lease term matches the business’s operational needs. This can lead to paying for equipment longer than necessary or struggling with renewals for short-term needs.
- How to Avoid: Evaluate how long you will need the leased equipment. If the equipment is crucial for day-to-day operations, a longer-term lease may be suitable. For seasonal needs, consider shorter leases or lease-to-own options that offer flexibility.
Not Managing Payment Schedules Carefully
- Mistake: Missing lease payments due to poor financial planning or a lack of reminders can lead to late fees, penalties, and damage to your business credit.
- How to Avoid: Set up payment alerts or automated payments for lease obligations to ensure that payments are made on time. This helps maintain your business’s good credit standing and avoids unnecessary late fees.
Overlooking Flexibility for Future Needs
- Mistake: Failing to plan for potential business growth or changes can leave businesses stuck with equipment that no longer fits their needs.
- How to Avoid: Look for leasing agreements that offer flexibility, such as upgrade options or early termination clauses. This ensures that your lease can adapt to changes in your business needs, whether that means scaling up or downsizing.
Not Considering the Option to Purchase
- Mistake: Many businesses don’t explore the option to purchase the leased asset at the end of the lease, which can be a missed opportunity if the equipment is still valuable to the business.
- Solution: Before signing the lease, discuss potential purchase options with the leasing company. If you believe the equipment will have long-term value, it might be beneficial to negotiate a buyout option at the end of the lease term.
Conclusion: Make Leasing Work for Your Business
Leasing can be a strategic financial tool for Nigerian SMEs when done right. By avoiding these common leasing mistakes, your business can make the most of leasing arrangements and use them to achieve growth without unnecessary financial strain. Always remember that due diligence, careful planning, and choosing the right leasing partner are key to a successful leasing experience.
At Micro Investment Support Services Ltd, we understand the unique needs of Nigerian SMEs and offer tailored leasing solutions to help your business thrive. Reach out to us today to discuss how we can assist you in making smart leasing decisions!
