Equipment financing and leasing is offered by a number of equipment lease companies in Canada. The only problem is knowing which company to work with, and moreover, how to ensure you receive the best rates, terms and structures available to your firm - based on your overall credit quality and the assets being financing.
Let’s get right to the point - let’s assume you have been approved for a lease financing, or that you have received what appears to be a competitive lease offer.
The information we share with clients focuses around how the lease company makes money - if you know that then clearly it becomes much easier to determine if you have a competitive structure - one that involves both rate, term of the lease, and conditions.
First of all, ensure you know what type of lease you are getting into - there are only two basic types in Canada, operating leases and capital leases. And we will keep it even simpler than that - if you wish to keep the equipment at end of the term of your desired lease get a capital lease, if you intend to use and return the asset negotiate an operating lease.
As we said, you can save or even make money if you know how a lease company makes money - and for the record, we are totally in favour of any lease company in Canada making a reasonable profit relative to risk and reward, as well as a reasonable return on their own cost of funds. (Leasing companies borrow money just as your firm does!)
So what areas of concern and diligence should you have around a lease financing? We can summarize all of the main methods a lease company makes money on your transaction in three categories: interest rate charged on the lease, any tax benefits that might come from the financing, and finally, the re-leasing or sale of any equipment that comes off lease or is returned.
Those are pretty key basics, but there are probably 20 other methods in which your lease is ultimately recorded as a profitable deal. Let’s look at some of those areas in which you can have a direct negotiation or input.
If your supplier is getting paid in advance your lessor will want to confirm they are ok with that – what you need to do at this point is ensure that the agreed-upon financing in this interim period is clear and acceptable to yourself. Additionally many lease companies offer, or have alliances with firms that provide asset insurance. We totally agree that insurance is a requirement, after all the lease company has to ensure the collateral they are financing is there of course. But you should ensure that the insurance is fairly priced.
Quite frankly we recommend to clients that they contact their own insurance broker and provide the lease firm with a certificate of insurance with the lease company named as loss payee. That’s a cost-effective method of addressing this issue, with you as the lessee still being in control.
Documentation and filing fees have continued to be standard in the Canadian equipment financing and leasing industry. Typical charges for this tend, in our experience to be in the 250-300$ range. Anything more excessive than this should be questioned. These charges cover the preparation and registration of lease documents under the government's Personal Property and Security Act regulations.
In general we are not in favour of clients paying commitment fees to get a lease transaction done – however we temper that by saying that if your transaction is very large and requires a significant amount of due diligence, credit investigation and analysis, then these fees we feel are sometimes justified. Ensure they seem reasonable vis-a-vis the size of your transaction.
In summary, the profits made by your lessor should be legitimate – profits vary based on your firm's overall credit quality, the size of the transaction, and the amount of time needed to consummate the transaction by both parties. The difference may not always be in the interest rate you are receiving, and we tell clients they actually get to pick their own interest rate – simply because your firm's overall credit quality has determined your general price structure as the leasing industry in Canada is very competitive.
Confused about how you can control your lease transaction and the profit made by your lessor? Speak to a trusted, credible and experienced leasing advisor with a track record of business finance success who can guide you through key aspects of a successful lease negotiation.
