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The FMV fair market value operating lease. It's not a bad example of, in our case, the 3 commandments of what this type of leasing finance affords Canadian business owners and finance managers. More about those 3 three later.
Leasing is hardly the 'cutting edge' in Canadian business financing. It's been around almost... Well... Since the Dead Sea was sick! Business has always benefitted from this type of finance; pretty well every industry in Canada utilizes it.
We have always maintained that lease finance removes something from your business. It removes what we long ago termed as the 'obstacle to innovation' that your company might be facing. That obstacle is known to you by another term - COST!
Businesses in Canada choose to invest in new assets, whether they are on the shop floor or in the Computer room for a variety of reasons. Quite often the access to new technology does a number of things for your firm. It can reduce your labour costs, allow you to work more efficiently and faster, and generally stay more ahead of the next guy... i.e. the competition.
We have rarely found a naysayer when it comes to equipment financing in Canada. That's not hard to understand, because, in fact, over 80% of businesses in Canada utilize either one of the two types of lease finance available in Canada. The simple reality is that the lease decision is most often driven by the cost of the asset and the amount of internal or external capital you must raise to acquire those assets.
Back to our three commandments. They revolve around the focus of one of those two types of equipment lease options accessible to yourself. That is what is known as the FMV operating lease. And those commandments are in fact better termed as 'choices’. Let's explain.
Entering into an FMV fair market value lease gives you the option of returning, purchasing, or extending/upgrading the leased asset. Exercising any one of those three options puts you in the driver’s seat when it comes to maximum flexibility.
Naturally, there are always some challenges - a good example being if your lessor is a great distance away. Our advice then? Ensure you know the cost of returning that asset, and... who bears that cost! You don't want to lock yourself into a provision that makes poor economic sense, diluting one of the key benefits that are a part of the lease.
Another key point for you to consider is simply the expected value of the asset at the end of the lease term. In the case of computers and telecom equipment, it might be nominal; in the case of larger costly 'yellow iron' type of assets, it might be significant. Utilize some business experience and product intelligence at the start of your transaction to determine what in fact those values might actually turn out to be.
Also, define with your lessor how FMV is determined. An unscrupulous lessor might in fact try and take advantage of the definition of FMV. Simple advice: Watch out for the actual language in the FMV verbiage in your lease. Some lessors might even be flexible enough to define the value of that asset based on their own or industry experience. In technology financing, Gartner Group think tank type data estimates the useful life of tech assets. And in other asset categories, the internet has played a great role in determining auction and residual values of all types of assets.
Operating leases can significantly lower your overall cost, the proverbial 'monthly payment'. Even more flexibility comes when you can bundle in other costs to acquire the asset - for example, installation, etc.
Trading in or returning the equipment and entering into a new lease can often be a win/win for yourself and the lessor. Your get newer technology, the lessor gets the value of the returned asset, and the Canadian leasing firm retains you as a good, paying client!
The decision to enter into an operating lease should be part of your overall decision to finance assets. In technology, it’s a huge driver of equipment and software sales. Your other option is of course to either purchase the asset for cash or enter into a capital lease to own the equipment at the end of the term.
Always remember though to consider responsibly the 3 commandments of the FMV operating lease - purchase, return, or upgrade /extend. Maximum benefit for minimum cost.
Speak to a trusted credible and experienced Canadian business financing advisor who can assist you in Canadian lease financing.
fmv fair market value operating lease finance
