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Answering the ' capital equipment acquisition question
Financing & Cash flow are the biggest issues facing business today
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Capital equipment finance choices in Canada. One of the basic issues in buying equipment often simply is ' Should the business owner lease or buy ' business assets, and if they choose ' finance ' why is equipment leasing a suitable and recommended options? Cash flow considerations are also important!
3 KEY CONCEPTS AROUND THE LEASE VS BUY DECISION
There are really 3 key concepts when it comes to deciding whether leasing or outright purchase is the way to go when it comes to financing your firm's fixed assets. The 3 areas you should focus on when acquiring business equipment are:
Managerial Issues
Accounting and Financial Issues
Financing and Tax Issues
When you have a handle on those three you’re poised for business asset acquisition success!
YOUR INTEREST RATE IS NOT ALWAYS THE MOST IMPORTANT ISSUE
The financing and tax issues are quite often perceived as the most important buy the Canadian business owner and financial manager. They are concerned with things like the financing rate within the lease (we believe that is often the least important in most cases as your credit quality will always give you a ' competitive ' rate), and the way the lease is shown on their books for tax and accounting reasons. Understanding end of the lease options is also critical in being successful in financing assets.
WHAT TYPE OF LEASE WORKS BEST FOR YOUR FIRM - CAPITAL LEASE VS OPERATING LEASE
You should always know, and consider what type of lease you actually need, or want to enter into. In Canada, it comes down to operating versus capital leases, and not all business owners are aware of the nuances of each. Lease payments in operating leases will be lower due to the residual position taken by the lessor on the asset .
THE OPERATING LEASE
When we talk to clients the simple way we describe an operating lease is simply to suggest that the client view this finance as simply an asset that is on rent. The rental payments are of course expensed , and in the old days, a significant amount of emphasis was placed on your firm's ability to ' hide ' the transaction off your balance sheet, thereby improving a lot of the equity and operating ratios that lenders and investors look at.
TALK TO YOUR ACCOUNTANT ABOUT ACCOUNTING AND TAX ISSUES
Unfortunately, with a lot of the new accounting rules that particular one benefit has diminished, but the reality is that operating leases for assets such as technology and heavy equipment are as popular as ever. Payment tends to be lower, and the flexibility of having 3 choices at the end of the term of the lease is perceived as positive by companies that are capital intensive when it comes to both technology or heavy equipment, our two chosen examples.
Oh, and by the way, those 3 choices..? They are your ability to purchase the asset at the end of the lease, return it, or extend /upgrade the asset. Talk about financing flexibility!
Your firm might choose a capital lease when it comes to your firm's desire to own, rather than ' rent ' the asset. These leases are non-cancelable, might have a higher payment attached to it because of your ownership right, and this type of lease has to satisfy several accounting criteria around ownership, useful life, and financing charges.
FLEXIBILITY AND TECHNOLOGY OBSOLESCENCE PROTECTION
The managerial issues around capital equipment finance tend to revolve around the flexibility of financing, technology obsolescence protection, and your ability to access other sources of credit other than ' the bank '.
Not every finance solution in Canada is perfect for all situations. Some Canadian businesses associate leasing with a higher cost, and they don't necessarily want another firm or institution to benefit from the residual value of the asset in question. They want that profit for themselves!
CONCLUSION
We always encourage clients to talk to their tax person or accountant when it comes to tax avoidance via leasing ( that’s avoidance, not evasion by the way !), accounting treatment, expensing payments, etc.
So when it comes to the question clients at 7 Park Avenue Financial always ask us -namely ' is it better to lease or buy capital equipment?" it's all about assessing the flexibility you need as well as understand your business credit profile - it's important to note that all firms with even a lower credit quality can still usually lease equipment - it's just that terms and rates are adjusted according to risk and asset quality.
If you have properly addressed leasing equipment and the ' lease or buy ' decision in Canadian asset acquisition consider speaking to a trusted, credible and experienced Canadian business financing advisor who can assist your with the proper financing of your transaction
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