Financing for equipment is sometimes a challenge for Canadian business owners and financial managers. What if you had a solid understanding of 3 key elements of Canadian equipment leasing and financing? Let’s explore some key information around three critical elements of lease financing and how they can address working capital conservation -
3 KEY ASPECTS OF LEASE FINANCING SOLUTIONS
1. What can be financed?
2. What are the types of leases / loans and rates available to my firm?
3. What is the best way to obtain prompt approval at the best interest rate, lease payments, terms and structures for my business asset acquisition?
So what assets can be financed in Canada? The reality of that answer is that almost every business asset can be financed, and moreover, two other key points need to be made. In many cases, even intangible assets can be financed – a solid example is software for your business or even the additional add-on requirements that come with many asset acquisitions – these might include installation, warranties, maintenance, shipping/delivery, etc. Furthermore, asset financing in Canada definitely includes financing used equipment, a major part of the Canadian equipment financing industry.
Millions of dollars of used equipment purchased here or in the U.S. or other international locations are financed annually. In many cases, a down payment might be required on a used piece of equipment. We add two critical cautionary items of note here – in certain cases, an appraisal or asset valuation or inspection might be required if the asset is new.
These two points would still clearly not negate the major benefits of financing a piece of used equipment. Why used? Simply because many assets in many industries still have a beneficial economic life after a typical usage of 3-5 years, for example, thing production equipment, etc. In many instances, especially with the internet and auction sites, pricing on used equipment might be exceptionally favourable.
One other solid tip is to get your lease financing approved in advance, as this might allow you to negotiate a better price with the vendor given you are pre-approved, and the vendor knows they will be paid directly from the leasing company.
UNDERSTANDING TYPES OF LEASES - WHICH IS RIGHT FOR YOUR COMPANY
Let’s move on to our second point, which is that there are some critical technical aspects to lease financing that are very important for business owners to be aware of. First of all, you should ensure that you understand there are two types of lease financing available – to keep it simple we will call them, as the industry does:
Capital leases
Operating Leases
Which one is best for your firm? We always dislike saying to our clients ‘it depends, ‘but the reality is that your final motivation with the asset should drive the choice of lease type. By that, we mean that you need to determine (in advance!) if you intend to own the asset at the end of the lease or if you simply want to use and return it after an agreed-upon amount of time, usually 2- 5 years. However, shorter and longer terms might apply (that’s the flexibility of lease financing).
Choosing the type of lease you pick will significantly impact how the lease is carried on your books, and also it is a critical factor in driving pricing. Operating leases will always be priced with a lower monthly payment as the asset is returned to the lessor at the end of the lease.
Clients ask us, ‘what if we later determine the asset still has a useful economic life and wish to keep it? Again, here is where the flexibility of lease financing comes in because you are allowed in an operating lease to pick one of three options at the end of term – you can return, purchase, or upgrade. Actually, there’s a fourth option: to agree to extend the lease for a pre-agreed upon amount of time.
BEST LEASE FINANCING RATES AND TERMS AND APPROVALS
Let’s move on to our final point, which is simply that you have decided to acquire an asset through lease financing. How do you go about that in Canada? We advised clients to work with a credible, experienced, and trusted lease financing advisor - even basic assistance around the final rate, term, and structure could save you many thousands of dollars in payments.
Or at the same time, negotiating on your behalf any critical areas such as down payment, limited personal guarantees, or end of lease options can all be the make or break point in Canadian lease financing success.
UNDERSTANDING TYPES OF LESSORS IN CANADA
Additionally, the lease financing industry in Canada is very fragmented and consists of captive firms tied to manufacturers, independent Canadian and U.S. firms, and very specialized firms that only do or finance certain things.
CONCLUSION - FINANCING AND LEASING NEED SOLVED!
In summary, arm yourself with some critical knowledge of equipment loan and lease financing, and you will be rewarded with the knowledge that you have chosen the best financing method for financing equipment, both new or used equipment and other business assets in Canada. Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you on all your asset finance needs when leasing equipment.
FAQ: FREQUENTLY ASKED QUESTIONS
How does my company prepare a successful lease financing proposal?
You want your lender to find out how purchasing equipment can help your business. Purchasing products for manufacturing, IT-based businesses could have a huge impact on your balance sheet when you finance with effective lease finance solutions within your cash flow budget. Demonstrate how new equipment and technology can increase your sales turnover and profitability.
