Understanding Equipment Leasing and Canadian Lease Financing: Guide for Businesses

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How Equipment Leasing Can Transform Your Canadian Business

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           Equipment Leasing and Canadian Lease Financing: A Comprehensive Guide 

Equipment Leasing in Canada

Because staying competitive is crucial for Canadian businesses, equipment leasing and lease financing become indispensable. WHY?  Because they provide your firm's necessary assets to operate efficiently. Furthermore, because lease rates in Canada have stabilized after global economic tensions in 2008 and the COVID-19 pandemic of 2019, it presents an opportune moment for businesses.

Evaluating Lease vs. Purchase Decision

We never entirely disagree with a client when a firm tells us that the overall interest rate is the most important thing they consider in a lease vs. purchase decision. However, at the same time, there are several other we would call ‘critical' factors in evaluating and getting approved for lease financing.

Comparing Lease, Purchase, and Bank Financing

Customers often weigh the lease decision against two other key issues: their ability to purchase the equipment outright and secondly consideration of a financing alternative such as a bank loan.

Naturally, all three strategies – leasing, purchasing outright, and financing via a bank loan still get you the equipment.

Lease firms in Canada tout the benefits of leasing and line them up directly against your other two alternatives.

Challenges of Bank Financing

Bank financing has always been challenging for any small to medium business (in the last year or two, large companies had challenges also!), and several critical factors come into play when you choose to finance your equipment through a bank loan.

Influence of Credit Quality on Lease Financing in Canada

In Canada, credit quality drives a large part of the final rate. The good news is that companies with decent to good to excellent credit will consistently achieve some of the best rates.

Financing Consideration for Challenging Situations

But more importantly, we point out that if your firm has challenges, little or no funds for a down payment, or a higher dollar acquisition, you can still get lease financing consideration at monthly lease payments tailored to your needs.

Navigating the Canadian Leasing Market

The Canadian leasing market is very fragmented - Call 7 Park Avenue Financial, a trusted, credible and most importantly, ‘experienced' lease and business financing advisor who can help you navigate the maze of Canadian lease firms.

Conclusion 

Let’s prove our point with a quick example. Your firm doesn’t have the contacts or necessary technical knowledge to navigate the Canadian lease environment. However, utilizing a lease finance expert will give you instant access to probably one or two of the best lessors suited to your asset, your industry, and your firm's overall credit quality.

 FAQ 

What are the critical factors to consider when evaluating lease financing versus purchasing outright?

While many firms initially focus on the overall interest rate as the primary factor, several other critical considerations exist. These include:

The ability of the business to purchase the equipment outright.

• • The option of securing a financing alternative, like a bank loan.
  • The potential requirements of a down payment, particularly with bank loans.
  • The impact of taking on a new equipment loan and how it might be bundled with your overall banking relationship, affecting loan covenants, credit facility limits, and more.

How does credit quality influence lease rates in Canada?

• In Canada, credit quality plays a significant role in determining the final rate for lease financing. Companies with decent to good or even excellent credit typically get some of the best lease rates. This factor emphasizes the importance of maintaining a good credit profile for businesses considering lease financing options.

Why might a company work with an independent finance firm instead of a bank for equipment financing?

• Choosing an independent finance firm over a bank might have several advantages, including:
  • Bank financing can be challenging to secure, especially for small to medium-sized businesses.
  • Banks might require down payments and other terms that can be restrictive for certain businesses.
  • An equipment loan with a bank can get bundled into the banking relationship, affecting loan covenants and the firm's overall credit facility limit.
  • While the interest rate from independent finance firms might be slightly higher (typically by 2-3%), the flexibility and terms they offer can make the additional premium worthwhile. A fair market value/operating lease may also be available through non-bank lessors

How can a lease and business financing advisor assist businesses in navigating the Canadian leasing market?

• The Canadian leasing market is fragmented for small business and SME's.. making it hard for businesses to find the best options without expert knowledge. A seasoned lease and business financing advisor can:
  • Help companies navigate through the plethora of leasing firms that offer financing
  • Provide instant access to the best lessors suitable for a business's specific needs based on the asset, industry, and the firm's credit quality.
  • Offer valuable advice on which lease option to choose, whether capital or operating, potentially saving businesses thousands of dollars.

What are the tax implications of equipment leasing in Canada?

• In Canada, lease payments for equipment financed via leasing companies can often be treated as an operating expense/business expense for tax benefits and are, therefore, usually fully tax-deductible against taxable income.
• However, the exact tax treatment might vary depending on the structure of the lease (capital vs. operating) and specific business scenarios. It's always best to consult a tax advisor or accounting professional for precise details about one's situation.
  
  Are there any industries in Canada that particularly benefit from equipment leasing?
  
  While equipment leasing can be advantageous for a broad range of industries, sectors like construction, transportation, agriculture, and healthcare often leverage leasing due to the high costs of equipment in these fields and the need for regular updates or replacements as technology evolves. Any established business as well as startups, can qualify for lease funding. New of used equipment can be financed.
  
  How do equipment lease agreements in Canada handle maintenance and repairs?
  
  The responsibility for maintenance and repairs usually depends on the terms of the lease agreement. In some cases, the leasing company may handle and cover service as part of the agreement, especially for shorter-term leases. Unless otherwise specified, the lessee might be responsible for maintenance and repairs for longer-term leases.
  
  What happens at the end of an equipment lease term in Canada?
  
  At the end of a lease term in Canada, businesses typically have several options: they can return the equipment, renew the lease, or purchase it at its residual value. The options available will depend on the lease agreement and the wishes of the lessor and the lessee.
  
  How does equipment leasing in Canada impact a company's balance sheet?
  
  The impact on a company's balance sheet can vary based on the type of lease. An operating lease usually doesn't add liabilities or assets to the balance sheet, as the equipment is a rental. Conversely, a capital lease may result in the equipment being counted as an asset and the corresponding lease obligation as a liability. Recent accounting standards have been evolving in this area, so it's crucial to stay updated and consult with an accounting professional.
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