Equipment Leasing in Canada: A Comprehensive Guide | 7 Park Avenue Financial

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Equipment Leasing in Canada: The Strategic Advantage Every Business Needs

Introduction 

Equipment leasing in Canada is a trusted and well-worn way to acquire assets for your Canadian business. Leasing has always been popular in Canada – it continued to be a dominant method of equipment acquisition during the 2008-2009 economic woes because it was an alternative form of financing to many traditional areas of business financing that had temporarily dried up, or in some cases ‘disappeared'!   Fast forward to  2023 -  Leasing assets is as popular as ever!!

Types of Assets and Equipment Finance Capabilities

We can’t think of any business asset that can’t be financed via leasing. Your firm has to demonstrate the ability to pay for that asset throughout the lease. In many cases, the acquisition of assets through lease financing is part of a long-term strategy for Canadian business owners and financial managers who wish to ensure they have productive, up-to-date assets that are being acquired at the lowest cost method, including flexibility that often comes with lease financing and monthly lease payments within cash flow budgets.

Benefits of Lease Financing Flexibility

What is that flexibility? It comes in various forms – some of the basics of lease programs are flexible payment arrangements, a term in the lease that meets your firm's anticipated use of the asset, and, probably as important as anything, a lower cash outlay for the acquisition of the purchase.

Leasing Vs. Traditional Financing

As bank lines and term loan facilities in Canada tightened up, a lease financing strategy became a ‘job one' for many Canadian firms who wished to remain competitive. As analysts and bankers focused on a company’s ability to generate cash and working capital, leasing companies provide the tool for any new or used equipment purchase via a lease period that makes sense for the asset's useful life.

Cash flow is probably better used to allow your firm to build up receivables inventories and generate profits.

Ease of Approval with Lease Financing

When clients share their stories about equipment financing, one of the key points they continue to make is that lease financing is easier to arrange and get approved. That is true for a variety of reasons. Still, simply speaking, it’s that lease firms are in one business only, they know their collateral, and they are focused on optimizing rates, terms and structures that work for themselves and the customer.

Comparing Costs: Leasing Vs. Bank Lending

That is why, in many cases, Canadian business owners and financial managers should assume that a decline from a bank or term lender will mean the same from an equipment financing firm. In some cases, leasing actual overall interest rate will be higher than a bank or term lender. Still, cash outlay, credit covenant restrictions, and flexibility structure make that higher rate generally worth it!

Advantages of Equipment Leasing

Speak to your account or lease advisor. You will also find several balance sheets, income statements, tax benefits around your taxable income, and advantages to leasing equipment as a business expense / rental expense.

Each firm wants to maximize those benefits, but some are more important than others. More sophisticated and larger firms tend to gravitate toward operating leases. In this case, transactions tend to be larger, the debt on the transaction is not on the balance sheet, and the company has the right to return, upgrade, or purchase for fair market value at the end of the term. That is true flexibility!

Equipment and add-ons may be included on an existing lease for ongoing equipment needs in assets and technology required by the company.

Technology and Equipment Leasing

Your firm should always consider a lease financing strategy when your asset acquisitions involve technology. Technology is changing, and your ability to buy the best, newest, as and when you need it is why lease financing drives technology asset acquisitions.

Initial Down Payments in Leasing  

Down payments are often required in leasing, but they tend to be minimal – 10% is a typical number, and that certainly beats an outlay of valuable cash and working capital of 100!

 Preparing for a Successful Lease Application 

Your firm's main challenge and focus should be to ensure you or your trusted lease financing advisor positions your application correctly. That involves a solid identification of who your firm is, what asset you wish to acquire, the structure desired, and, most importantly, the ability to show that the weight of evidence suggests you can pay for the asset over the selected term. A solid financial statement presentation is vital.

Working with credible lease advisors and firms is also crucial – fostering a long-term relationship in that area will reap many benefits over the years.

Key Takeaways  

1. The Significance of Equipment Leasing in Canada: Equipment leasing is a popular and trusted method for businesses in Canada to acquire assets. It became particularly significant during economic downturns, like the 2008-2009 crisis, as it offered an alternative to traditional financing avenues that were less available.

2. Flexibility and Benefits of Lease Financing: Leasing provides businesses with flexibility often unavailable with traditional financing. This flexibility includes varied payment options, tailored lease terms, and typically a lower initial cash outlay.

3. Leasing vs. Traditional Bank Financing: Leasing is often easier to arrange and approve than traditional bank loans. While the overall interest rate for leasing might be higher, the flexibility and reduced upfront costs often make it a more attractive option. Lease firms focus specifically on this form of financing, making them experts in optimizing the conditions for themselves and the customer.

4. Assets and Equipment Leasing: Almost any business asset can be financed through leasing, from office equipment to machinery. Companies should always consider leasing, especially for rapidly evolving technology assets, as it allows them to stay updated without heavy investments.

5. Financial and Strategic Advantages: Beyond acquiring assets, leasing can offer balance sheet, income statement, and tax advantages. The financial structuring of some leases, like operating leases, can keep debt off the balance sheet, providing businesses with strategic economic benefits.

Conclusion

In summary, equipment leasing in Canada is just good business sense and provides many solutions for asset acquisition. Flexibility is critical in leasing, and you should focus on which benefits and structures work best for your firm, as every company and industry has different business models and challenges. Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor - you will be in good hands for help with your customized solutions around SME small business finance needs around new equipment and technology needs.

FAQ

Are there any assets that cannot be financed through equipment leasing?

Virtually any business asset can be financed via leasing in Canada. However, the leasing firm will typically require proof that your business can make the lease payments over the term.

What are some of the flexible benefits associated with lease financing?

Lease financing offers several flexible benefits, including varied payment arrangements, customizable lease terms tailored to a firm's anticipated asset use, and often a reduced initial cash outlay for the asset acquisition.

How does the approval process of equipment leasing compare to traditional bank financing?

 Many clients find that lease financing is generally easier to arrange and approve. This is partly because lease firms focus solely on this business, are well-versed with their collateral, and aim to optimize rates, terms, and structures that benefit both themselves and the customer.

Are there any tax or balance sheet advantages to leasing equipment?

Yes, leasing equipment can offer several balance sheets, income statements, and tax advantages. The specifics can vary for each firm, but some businesses, especially larger ones, prefer operating leases because these do not reflect the debt on the balance sheet. Additionally, such leases allow companies to return, upgrade, or purchase the equipment at its fair market value at the end of the term

How does equipment leasing in Canada compare to equipment leasing in other countries?

Equipment leasing in Canada has unique characteristics shaped by the country's economic landscape, regulatory framework, and business culture. While the core principles of leasing remain similar globally, the nuances can differ. For instance, in the United States, leasing might be driven by the attraction of tax breaks or specific accounting benefits. Due to their varied industrial sectors, European countries might have a more diversified leasing market. In contrast, Canada's robust banking system and specific tax incentives create an environment where equipment leasing is a popular and strategic choice for many businesses. When comparing equipment leasing across countries, it's essential to consider the local economic, regulatory, and industry factors.

What are the potential disadvantages or risks associated with equipment leasing for businesses?

While equipment leasing offers numerous advantages, there are potential downsides. One of the main disadvantages is that, over the long term, leasing might be more expensive than purchasing the equipment outright. Businesses are essentially paying for the convenience of lower upfront costs and flexibility. Additionally, lease contracts can come with strict terms, and breaking or altering these terms can result in penalties. There's also the risk of being locked into outdated technology or equipment if the market evolves rapidly. Finally, since the business doesn't own the leased equipment, they don't build any equity in the asset, which could impact the company's overall asset value.

How has the rise of green technology and sustainability impacted equipment leasing trends in Canada?

The global shift towards sustainability and green technology has certainly influenced equipment leasing trends in Canada.

As businesses aim to adopt more environmentally friendly practices, there's an increasing demand for leasing green and sustainable equipment. This might include energy-efficient machinery, electric vehicles, or renewable energy systems like solar panels. Leasing allows companies to adopt the latest green technologies without the hefty upfront costs, making sustainable transitions more financially feasible. Additionally, some leasing firms in Canada are now offering incentives or specialized lease agreements tailored to green technologies, further encouraging businesses to make sustainable choices.

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