Insights from the other side of payment defaults.

When your lessee defaults on your equipment lease, you might find yourself asking: “Why are they not paying their lease while they continue to use your equipment (and if they’re not paying us who ARE they paying)?”

I am here to answer that question for you.

I have spent over 25 years practicing law in the realm of commercial litigation and bankruptcy.

I have helped hundreds of clients over the years restructure their debts when their business hits troubled times. Part of my responsibility is to advise them on who they must prioritize as far as payment and who they can avoid paying. The ugly truth is that any unsecured debt, such as leases, fall to the bottom of the must pay list every time.

I can say unequivocally that payment defaults are conscious decisions. When falling on hard times, we put a clear plan in effect to preserve precious cash.

Let me share with you our typical priority list and why. I’ll also share with you some advice of how you
can move your equipment lease to the top of that list.

Who are the companies that get priority?

In my experience, the creditors who get priority are those who with the most leverage and who can control their product/collateral or who can cause real problems for ongoing business. Following is a list of who gets paid first and why.

Utilities (Electricity, heating fuels)

1. Utilities (Electricity, heating fuels)
   Always number one on any list. These companies keep a tight control on what they sell, and they will immediately shut it down in the event of a late payment. No payment, power, no delivery.
2. Communications (Cell Phones, Internet, and Landlines)
   Like a utility, a company needs this service to conduct business, or they are dead, thus they are top of any list for prompt payment. And just like utilities, they will shut down service quickly with scant warning.
3. Banks with Liens on Bank Accounts (a.k.a. Cash Collateral)
   Many term loans or lines of credit bank lenders strongly encourage the borrowers to bank with them. If a company gets behind on a note payment, they can simply offset any cash in the bank account, leading to an inevitable chapter 11 filing to get the money back. This control over critical cash puts these lenders high on the list.
4. Payroll (Often Including Payment to Owners)
   Of course struggling companies need employees to focus on their jobs and the wellbeing of the business, not worry about their paycheck; this makes them a clear priority.
5. Taxes, Including Payroll Taxes
   Few business owners are foolish enough to put this off. Just as with wages, if not paid (especially payroll taxes), the debt to the IRS will pass through, even in bankruptcy, and hound the debtor and its principals forever.
6. Critical Vendors of Raw Material, Goods and Components
   Again, this comes down to leverage. In many cases the company has lost its credit worthiness with this important group and is now on a COD basis, no cash means they will not get their critical goods or services supplied to keep their business running. They must reserve and plan for these demand payments.
7. Landlords
   An aggressive landlord can cause real trouble and I’ve seen them just change the locks in the event of non-payment. Although doing so is generally not legal in most states, the consequences of such action can be lethal to a struggling company. That gives them an advantage on the priority list.
8. Trade Debt Personally Guaranteed by Owners
   This is something that’s near and dear to the principals of a troubled company and it should be. If the company goes down, they potentially could be facing personal bankruptcy. That gives this debt a measure of priority. Even if the debt is old or not for critical components, most lawyers will advise paying this before the last category.
9. Lessors and/or Equipment lenders
   Sorry to say, lessors are last on the list of priorities and they know why- lack of leverage or control over the asset. I am sure most do not understand they are at the bottom of the list for payment, but as you now see, the deck is stacked against them. They try to engage the debtor, offer to extend, to rewrite, they send letters, emails and texts, but when a lessee is making hard choices – choices informed by a legal professional like me – they are going to stay last on the payment list, period. That is unless you have leverage like a utility, a means to control the use of your collateral without any delay or legal hoop jumping.

Luckily for my profession anything approaching this capability has been nothing but a pipe dream-remotely- instantly disabling equipment in place! Good luck.

But new emerging technology has now changed this dream into reality, and in my humble opinion you owe it to your company to learn about it. This revolutionary wireless technology is called Blok Box™, and it will provide absolute control of collateral for the entire lease term, and it is always right at your fingertips when needed.

A prudent lease company will always do their best to work with customers, but with the advent of BlokBox™ you now can quickly and firmly re-educate your lessees as to the priority of your debt. And if necessary, you can shut-down the leased equipment to stress your point. The Universal Commercial Code clearly allows this, and now finally technology is here to deliver this leverage.

In a new lease or an existing lease your customers should know that if they do not live up to agreements, if they refuse to pay, or if they habitually pay late, you have the ability to enforce payment like a utility. No lawyers, no endless collections efforts and no repossessions.

If I represented a leasing company, my advice would be simple, do not wait, do not let yourself be put off month after month accumulating debt, be firm and fair knowing you can shut the equipment off. Otherwise you will find yourself in a situation where it makes no sense to repossess, you’ll sit unpaid while your collateral continues to generate revenue for your borrower.

I have seen this hundreds of times and frankly I cannot imagine it’s a good place to be. It is not nefarious or confrontational that you should wield this leverage. Look around, it is standard practice in many consumer and business categories. It is not mean spirited, it actually alleviates a great deal of angst, as the understanding is clear.

A final observation: When the priority debt comes knocking, you would be surprised how many “hard-up” businesses can find money…it’s all just a matter of priority.

Peter T has been practicing … for what feels like forever…he would rather be sailing …and is co-founder of Lease Security Systems, creator of Blok Box™.

For more information visit www.get.blokboxnow.com or email info@LeaseSecuritySystems.com