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Leasing Business Equipment In Canada
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When Do Financing Leases Make Sense Via A Leasing Company In Canada
Financing leases in Canada. Should we... or perhaps we shouldn’t... and who with... and when... and why. Can we make up our minds here!
No one is a bigger fan of leases and lease equipment strategies in Canada than us... when you're with the right leasing company it's a powerful double whammy of financing success. But is it always advisable to choose equipment finance, and when are there some clear disadvantages to this popular method of Canadian business financing. Whether your firm is leasing machinery or upgrading computers and software equipment leasing solutions make sense.
THE STATISTICS ON THE USE OF LEASE FINANCING IN NORTH AMERICA
Although 80% of North American firms utilize equipment leasing finance it might not always be your preferred strategy. Two obvious alternatives of course are to purchase the equipment outright, while the other options might just be a term loan strategy.
If there was in fact one perfect method of financing fixed assets, trust us... we'd be all over it. However, the real world suggests that it's always about some pros and cons where you as the business owner or financial manager have to weigh in.
One of the most obvious benefits of those who have used leasing before is simply that it more efficient and less time consuming than seeking loan financing. The industry in Canada is basically categorized as ' document efficient’... smaller transactions can almost always be approved in a day or so... sometimes within hours if you're at the lower end of the spectrum.
THE MAJORITY OF BUSINESS ASSETS DEPRECIATE
One other key advantage of asset finance via a leasing strategy is your ability to manage what is known as the obsolescence factor. Because you're paying over a period of time and the lessor owns the asset it becomes the risk of your leasing company when it comes to declining asset values. Most of us know that 99% of business assets depreciate, not appreciate in value. That is one other reason why the lease term you choose is important, ie matching finance to useful economic life.
UNDERSTANDING THE OBSOLESCENCE ISSUE IN ASSET ACQUISITIONS
One solid example of the whole issue of obsolescence is the technology area. Whether its computers, software (yes software and software licenses can be financed) and telecom equipment are prime examples of expensive higher ticket items that can lose their value almost overnight given changing technologies. So to pay for them in cash or to lock into a term loan that has no flexibility is simply... not recommended! End of the lease decisions are important and should always be considered upfront.
LEASE FINANCING PROVIDES ADDITIONAL FLEXIBILITY
Many companies in the manufacturing sector rely on production assets to run their company. These quite often need to be upgraded, if simply for the wear and tear aspect something mechanical. So the idea of flexibility in a lease to return, upgrade, trade-in, and then refinance is a highly sought after financing strategy in Canadian business.
Not all fixed assets that your company needs will be needed for a long time... in some cases, they may even be project-oriented. That’s when a shorter lease term with an aggressive depreciation policy makes solid sense when it comes to an equipment lease.
That’s just a couple of advantages of leasing in Canada. But should you always be using this option? We do like to present a balanced picture! Lease accounting and the numerous tax and depreciation and expensing payments issues should generally always be discussed with your accounting team. Accounting for lease transactions is always best discussed with your financial managers in the company.
THE LEASE VERUS BUY, VERSUS RENT CONUNDRUM FOR BUSINESS OWNERS
The financing lease vs operating lease will always come up when you're acquiring significant assets relative to the size of your business. If there are situations when you can maintain residual upside in the value of the equipment or asset (perhaps your company jet?!) then by all means consider an operating strategy or a term loan scenario.
The capital lease allows your firm to own the asset at the end of the lease. The interest rate for an equipment loan for all types of leases will always be relative to your overall financial strength as determined by the lessor. Lease companies in Canada are very competitive in the current low rate environment - and lease pricing and cost of finance is often even more attractive with an operating lease.
Also, if you are in a position to pay cash and not hinder your overall cash flow situation then there is some accounting and cost advantages to outright purchase versus a capital lease to own.
CONCLUSION
So, the bottom line today on leasing equipment. It's simple to manage and understand the weight of evidence that come with any lease vs. buy strategy when it comes to business equipment leasing.
Need help? Speak to a trusted, credible and experienced Canadian business financing advisor today for your lease equipment needs.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
