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Billions of dollars of assets are financed via an asset lease every year in Canada.. What happens to these assets at the end of the lease, and how are some of the asset disposition and sales issues handled by your firm or the lessor? Let's examine some of the facts relative to the Canadian marketplace for equipment financing. Let’s dig in.
WHAT IS THE TRUE VALUE OF THE ASSET YOU ARE FINANCING
Naturally, a significant amount of time is spending at the inception of leases in determining the new or used value of equipment to be leased. In cases where used equipment is being financed, there is a need for appraisals and inspections, which are usually performed by independent third parties who have a strong sense and professional experience in valuing these assets. In certain cases where a lessor has repossessed equipment and the asset is for sale then an appraisal is also a very valuable tool.
END OF THE LEASE DECISIONS ARE CRITICAL
At the end of the lease, depending upon the structure and type of the lease, the business owner or financial manager must enter into negotiations to address the final disposition of the equipment. We must remember that your firm entered into what is known as an 'operating lease 'you have in fact opted to 'use' equipment, rather than 'own 'it.
That of course infers equipment being returned to the lessor, or, per the terms of your contract, it can be purchased. Purchasing equipment at the end of a lease has significant implications for you around the value and use of that equipment. Naturally, if you intend to simply return the equipment the lessor is chartered with disposing of that equipment.
TAKING CARE OF BUSINESS ASSETS
We also note that it is a prudent business decision for Canadian business owners to monitor the value of leased assets through the term of their lease, especially important as the lease approaches termination. As the lease approaches its end of term the lessor may also invoke its right to inspect the equipment, suggest return provisions, and, most importantly to the Canadian business owner, start to suggest the purchase price of the asset if in fact, your firm wishes to keep the asset, if in fact, you have entered into that type of lease.
WARNING – BUSINESS ALERT! Make sure you ensure your lessor has the responsibility to notify your company prior to the end of the lease term. If that is not agreed upon, diarize the lease end of term. Thousands and millions are made by leasing companies in North America who continue to bill at the end of your lease term, simply because that issue was not documented properly! They wouldn’t do that, would they?
From the lessors perspective, it wants of course to ensure a reasonable and proper value of the equipment. A major term in Canadian equipment lease financing is a term called 'fair market value '. That term suggests that the asset under lease has a value to someone in the marketplace assuming there are a willing buyer and a willing seller.
The business owner or financial manager will want to look back at the asset and understand any upgrades or maintenance that was performed on the asset. Business owners are encouraged to look out into the marketplace and determine what current values are - the internet has become a fabulous asset to lenders and borrowers in assessing the true market value and availability of many asset types.
There are hundreds, perhaps thousands of used equipment dealers, brokers, and remarketers who can provide solid input into the value of the asset. Naturally, contact several sources rather than one is a prudent action for both the lessor and the Canadian business owner. As information is gathered the true value of the asset will emerge.
CONCLUSION
In summary, as a general rule, it is incumbent on the lessor or finance firm to ensure proper diligence and procedures around assets coming off lease. The lender wants to ensure they are made whole on the transaction, as leases are a combination of interest charged and asset realization at the end of the term. For the Canadian business owner proper care, maintenance, and ongoing valuation of the leased assets is a valuable investment in time and cost. This investment becomes more important as the business owner evaluates disposition options at the end of the term in the conditions of their lease agreement.
Your business can choose between operating leases or a capital lease. Lease payments and lease term can vary with your specific needs. To purchase the equipment for a small business the capital outlay can be significant. Financial services provided by 7 Park Avenue Financial can help you in your choices of asset finance. Over a period of time, many businesses will always need to purchase or upgrade assets. If you're looking for a trusted, credible and experienced Canadian business financing advisor for your leasing needs talk to 7 Park Avenue Financial today.
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Stan Prokop
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