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Although the Canadian equipment finance industry is very competitive many Canadian business owners and financial managers don’t fully understand how equipment lease rates and interest finance charges are calculated... how they can be managed, and what issues affect your ultimate monthly pricing. Let's examine some 'need to know' points that will allow you to fully maximize the benefits of lease financing assets in Canada.
We don't blame clients for always wanting 'the best deal‘... the 'lowest rate'... the 'smallest monthly payment‘. Some of the variables that go into those issues are controlled by the lessor; some can easily be managed by you.
Asset quality is often a factor in Canadian lease finance. The ability of either yourself of the lessor to understand the ongoing value and the final residual value of the asset you are financing plays a key role in equipment finance pricing in the Canadian marketplace. A win-win situation exists of course when both you and the lessor have a transaction that meets both of your needs.
Lessors refer to their profit on a transaction as their 'yield'. Many lease finance firms strive to earn a certain constant yield on their lease transaction they finance for Canadian business. It’s simply their ultimate profit for putting funds out on your transaction.
Canadian business mangers choose from only two basic lease types when acquiring and asset via a lease finance strategy. It's as simple as that, you are either selecting a capital lease, which is a 'lease to own' strategy or alternatively, you are choosing and operating lease. The operating lease is a transaction wherein you have a stated intention to return or upgrade the asset during or at the end of the lease term. The true beauty of the operating lease is that it also gives you still the right to purchase the asset, even though that might not have been your original intention.
Put yourself in the eyes of the lease company, and let’s use a simple example of a 1000.00 transaction. If the final residual value of the asset at the end of the term of the operating lease is 100.00 and the lease firm estimated this as let's say 50.00 then they have just realized a further 50.00 profit on the asset.
So who is the best to understand the actual true value of the lease at the end of the term? Quite frankly, sometimes it's you, who understand your business only too well. Alternatively, many lease equipment finance firms have significant expertise also. It depends,
The type of lease company you choose to work with also has a significant effect on your interest finance charges. The bottom line, your lease firms borrow funds also. In Canada, that’s typically done through insurance companies and banks. So a general rule of thumb is that if your lease finance firm is larger, well-funded, and well managed... the bottom line is that your chances of more aggressive lease rates increases.
We hate calling them 'games' but the industry uses many nuances in pricing and structure and terms that significantly affect your overall finance charges. What are some of these?
A good example is advance payments you are asked to make or security deposits. If you are asked to make a significant security deposit ensure interest accrues to your security deposit, at a rate commensurate with the size of the deposit.
Many assets are acquired on an interim rent basis... that has the lessor outlaying cash before you actually sign off on the final acceptance of the asset. It could be a complicated computer project that is being funded, or perhaps a production asset that is being assembled by your vendor in stages.
We've highlighted just a few of the basic issues that should come into consideration by your firm when you are concerned about getting those 'best' equipment lease rates' in the Canadian marketplace. There are others.
If there is a bottom line here it is simply that it’s worth it to take some time and understand how some upfront knowledge and consideration at the start of your lease finance process can positively impact interest finance charges in your favour as the lessee. Speak to a trusted, credible and experienced Canadian business financing advisor who can guide you to the appropriate lease finance pricing for your ongoing equipment needs.
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