After my first post on “10 Leasing Tips Every New Business and Startup Should Know”, I had a conversation with the Controller of a company about making an earnest money payment for a proposed equipment lease for his business. I realized I hadn’t really properly covered this topic in my last post. There are some pitfalls to avoid, so here are 7 things every business needs to know about earnest money payments in lease transactions.
- An earnest money payment is sometimes required by an equipment financing company (lessor) from a lessee equal to a fixed amount or one month’s rent as a refundable application fee. The earnest money payment can be called an application fee, deposit, due diligence fee, etc.
- On receipt of a signed lease proposal and the earnest money payment, the financing company (lessor) works with the lessee to gather all the required and requested financial and equipment information, writes an internal credit request memorandum, and submits the lease transaction to the credit department for approval. This information is submitted along with the signed lease proposal, the payment, and any application fee.
- Some financing companies (lessors) require the earnest money payment as security to ensure its processing costs are covered if the lessee decides not to proceed with the agreed lease (No one likes to do a ton of work for free).
- Not all financing companies require an earnest money payment or application fee in every case.
- If the lessor approves the lease transaction, the earnest money payment is applied to the first or last rental payment due under the lease. If the lessor declines the lease transaction, the earnest money payment is refunded.
- In addition, if specifically agreed in the lease proposal, regardless of whether a lease is approved or declined, a small portion of the earnest payment will be retained as an application or processing fee.
- It is easy to negotiate a reasonable earnest money payment. Read the lease proposal and don’t sign until you understand what you are agreeing to.