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THE FINANCE COMPANY LEASE AGREEMENT - FINALLY UNDERSTOOD!
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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EMAIL - sprokop@7parkavenuefinancial.com
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8
We previously wrote on some of the challenges that Canadian business owners and financial managers face in getting successful equipment lease financing in place for their asset finance needs via their capital expenditure plans. The current difficult economic environment makes it more challenging than ever for Canadian business owners to get the proper rate, terms, and structure that they deserve.
Success lease equipment financing requires a working knowledge of what the lessor is looking for in a transaction.
CREDIT APPROVAL ON LEASE FINANCING APPLICATIONS
Owners can safely assume that the lender is doing significant work on financial statement analysis to satisfy them they are making a proper financing decision with your firm. Included in this analysis is a strong emphasis on cash flow history and projections, operating efficiencies of your firm as measure by industry-accepted ratios, and balance sheet analysis with respect to the amount of debt your firm is carrying, etc.
CREDIT APPROVAL VIA LEASE STRUCTURING
In our previous article, we suggested that business owners should be aware of some key 'structuring options 'that lenders use when they are contemplating an approval that they are not 100% comfortable with. These options, previously discussed were:
- Utilizing higher rates to compensate for risk
- Use of Security Deposits
- Use of advance payments
- Structuring higher payments in the earlier years of the lease
- Shortening the lease term to offset long term risk
Business owners should be aware of some additional enhancements that can further a financing approval when your firm might not fully qualify for your desired amount of financing and overall structure.
Let's looks at some of those additional enhancements that complement the 5 areas we have noted above.
Business owners who are not familiar with some of these financial nuances should employ the use of a trusted leasing advisor with credible experience, thereby significantly increasing their chances of getting a lease financing approved. Even lease accounting issues can be reviewed with the exertise of a lease professional. Borrowers can choose between an operating lease or a capital lease - capital leases are also known as a ' finance lease '. Accounting standards have changed how operating leases typically were used - ie off-balance-sheet financing.
Those two types of lease finance focus on what happens at the end of the lease term and can also affect your monthly lease payments. In a finance lease, the lessee typically chooses to own the asset at the end of the lease term, which is usually hand by what is known as a ' bargain purchase options - for instance .. making the last payment a nominal 1 dollar for ownership of the asset which is transferred to the lessee.
Operating leases on the other hand give you the right to use the asset but now own it. Monthly payments are much lower in an operating lease.
Assessing the useful economic life of the assets you need and will use is important.
THE PERSONAL GUARANTEE ISSUE ON EQUIPMENT LEASES
Business owners might not always be comfortable with providing a Personal Guarantee on the transaction; however personal guarantees are a clear fact of life in the Canadian business financing environment.
The logic of the lender, in this case, your equipment lessor, is that you are more motivated to make those payments if you are personally obligated in the matter also. Naturally, companies incorporate to avoid personal liability but business owners are often called upon by lenders, lessor, etc to provide a guarantee. It goes without saying that the lender will also want to validate the quality of your personal guarantee.
ADDITIONAL COLLATERAL
In some cases, the lender might request, additional collateral on the transaction. This would be collateral that is currently unencumbered, but in effect shores up the lessor's overall position, allowing your transaction to be approved. In many cases, you will be required to provide some form of documentation (usually an appraisal) of the additional asset.
In some circumstances an effective additional collateral might be credit life insurance on the transaction - in a smaller of mediums sized Canadian firm the lender/lessor may rely on that insurance in the event something happens to the owner, that something being ' death ' of course!
Not all Canadian business owners know that in some cases the manufacturer that you may be purchasing and financing the equipment through is in some cases agreeable to providing a limited or partial guarantee on your transaction. They are making a sale, generate profits from the sale to your firm, and may be able to remarket the asset if the lessor requests assistance in this area.
CONCLUSION
Finally, in some cases, your lessor may request a letter of credit or Certificate of Cash deposit as additional collateral. In our experience at 7 Park Avenue FInancial , this is rare, as your firm traditionally would note want to encumber cash in such a manner.
So what's our bottom line? It is simply that lease financing can be a challenge, but if you work with a lessor to offer up and co-operate on some manner of structuring, as outlined above, then your chances of successfully getting a lease financing approval increase immensely! It's all about understanding risks and rewards.
Click here for the business finance track record of 7 Park Avenue Financial
Stan Prokop
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