There are several finance companies which make billboard equipment leases. They are anxious to tell you that leasing will save your capital by allowing you to finance 100% of the cost of the sign. None of them talk about prepayment penalties.
Lease prepayment penalties can kill you.
It’s normal for a leasing company to have language which says that you must pay the sum of all future payments in order to prepay the billboard financing lease. This means you must pay all future projected interest and principal payments even if you pay the lease off early. Prepayment penalties mean you may have to pay 20-30% more than you originally borrowed just to get out of the lease.
Here’s an example. Suppose you lease a $150,000 digital billboard at an annual financing charge of 10% with 60 monthly payments of $3,187. Let’s suppose Clear Channel makes you an incredible offer the month after the board is built and you call your leasing company to ask for a payoff. They will tell you owe $191,224 or 60 times $3,187. That’s a prepayment penalty of $43,161 or 29% of the amount that you originally borrowed.
If you make all scheduled lease payments for one year and then want to prepay the lease you will owe $156,000 which is $19,151 or 19% more than the $125,660 balance remaining on the lease after year one.
Never accept sum of all future payments prepayment language in a lease you intend to pay off early. Don’t lease if you plan to sell your company before the leases expire.
