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LEASING EQUIPMENT IN CANADA
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Equipment Lease Financing In Canada
Financing & Cash flow are the biggest issues facing business today
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As business equipment lease financing is used by over 80% of Canadian business borrowers, one would think the business owner/financial manager utilizing leasing finance would pretty well know all there is to know about the popular financing vehicle. In the current low-interest-rate environment it is more important than ever to consider the low cost of financing assets you need to grow your business. One would think... but that's unfortunately not the case. Let's examine some key aspects on that point. Let's dig in.
WHAT ARE THE ADVANTAGES OF BUSINESS EQUIPMENT LEASING
A good start is to re-enforce the fact that the advantages of an equipment lease remain pretty well constant more than ever. They include 100% financing ( in some cases, a down payment might be required ) , as well as the cash flow savings inherent in the transaction - allowing your company to match cash flow to the useful life of the asset. Knowing those fixed payments won't change during the lease's life allows the owner/manager to better handle cash outflows better?
WHAT ARE THE ACCOUNTING ASPECTS OF LEASE FINANCE
1. Accounting is critical to your lease transaction - the important reason is the flexibility that comes with this financing method. Because you have two separate choices when you enter into a lease, the way you account for the lease has implications for how that affects your balance sheet and income statement. The best way we explain this to clients is that you have to decide whether the lease you are entering into is a:
Lease to own
Lease to use
Respectively, the technical term for each of these choices is capital lease ... or operating lease
The best way to think of that decision point is often referred to as ' risk and rewards of ownership. ‘
So bottom line, if you choose a capital lease as an example, you have chosen to own and dispose of the asset and account for it in that manner. That decision is made by your firm and the equipment leasing company in advance of the transaction and lease agreement. A good example of an operating lease use is renting machinery for a short term project.
Computer and technology financing also lends itself to operating leases.
2. What's the deal on which of those two choices you choose via equipment leasing companies? Typically lessees (that’s you) choose operating leases when they focus on using the asset but want to upgrade or return it at the end of the lease term. The capital lease denotes ownership, on the other hand.
When you enter into a capital lease, you should be focusing on how long you will use the asset and how you will dispose of the financed equipment at end of term. That can be via selling it yourself or using it as a ' trade-in' of sorts on a similar use asset.
KEY POINT - During an operating lease, you can modify payments via upgrades, lease extensions, etc. Capital leases have a ' hell or high water' clause that specifies you're responsible for all the fixed payments for the lease term. There is rarely' no mercy ' on ' buying out' the lease.
3. Residual Value - in both our lease examples, the owner /manager needs to focus on the asset's value at the end of the lease term. For the capital lease, that will involve how you handle the ' book value' on your accounting records, as well as knowing what you might be able to get for the asset if you sell it. When it comes to equipment leases the useful life of the equipment should always be a consideration for the lessee.
The operating lease places, even MORE, focus on the residual or final value of the asset at the end of the term. That’s because, with that lease, you have the right to return, upgrade via a trade-in, or extend payments for a mutually specified period of time.
4. SUBLEASING? In certain cases, your firm as the asset owner can ' sublease 'the asset to a third party. In effect, your company becomes the lessor! While you are still responsible for the payments, you collect all or a portion of those payments from a third party. In larger firms, this might be to a subsidiary on an intercompany transaction.
Note also that equipment financing for new business or startups is also always available.
CONCLUSION
All types of equipment can be financed when it comes to types of equipment, both new and used. If you want to ensure you're benefitting from all the positive aspects of acquiring assets through financing, seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your Canadian equipment finance needs. Don't use your line of credit when buying expensive equipment - leasing conserves cash whether it's a business loan or an equipment lease.
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Stan Prokop
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