YOUR COMPANY IS LOOKING FOR AN OPERATING OR FINANCE LEASE!
Understanding Operating Leases Vs Lease To Own Financing
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An ' operating lease '. Canadian business owners and financial managers have access to what is known also as ' FMV LEASING ‘... they just sometimes don't know what that is and when to use it. Let's cover off what you need to know.
RETURNING ASSETS OR KEEPING ASSETS - THATS THE DIFFERENCE !
When you enter into an operating lease there is generally intent by your company to return the asset to the lease company, as opposed to finance leases where you have a very clear intent to keep and own the asset at the end of the lease.
OPERATING LEASES OFFER END OF TERM OPTIONS
Oh, by the way though, just because you enter into FMV leasing (FMV = Fair Market Value ' it does not necessarily mean you absolutely have to return the asset. That is one of the beauties of operating leases; you have several different choices at the end of the lease term. We can see why the operating lease is called a ' true lease ' ... you're leasing... not owning... as simple as that.
One of the main challenges in what you need to know about an FMV lease is simply that the true monetary value of the asset in your transaction is not known at the beginning of the lease term. Time will determine the true market value . Take computer assets for example... with all their changing technology who could possibly predict with absolute certainty what a computer in today’s world will be worth 3 or 4 years from now?! Not us... that’s for sure and we toiled in that industry for 20 years!
Lease payments under capital and operating leases will vary substantially due to the residual value. The option to purchase is a key part of the benefits of operating leases.
LEASE ACCOUNTING PLAYS A KEY ROLE
In operating leases, the actual accounting of the lease plays a huge role in your overall transaction. That’s because of how the transaction is treated has a significant impact on your balance sheet and income statement. Also, accounting rules do not allow the lease company to specify the value of the asset at end of lease term. That often tends to be both good and bad for your company, the lessee as we will explain. Interest expense is also a key part of the capital as well as FMV lease options.
PLAYING BY THE RULES
Many lease companies in Canada and lessees try and arrange a side agreement between themselves. That certainly can be done, but it is somewhat dangerous as it is often viewed as circumventing the lease accounting rules around the operating lease. In a worst-case scenario your auditors, or CRA - Revenue Canada might, by interpreting accounting standards, in fact, impose penalties around interest, taxes, etc, as these are in fact impacted by the real structure of an operating lease. Spend some time and determine your best guess around useful economic life of assets you lease.
The ultimate challenge of the operating lease is the value of the asset at end of the lease term. You have to be able to be in a position to understand what the asset is worth from a monetization perspective. The good news is that with the internet and other sources business owners these days have a huge amount of information available to them with respect to the true value of any asset on the balance sheet.
CONCLUSION
The leasing company is of course entitled to a ' reasonable profit '. We would never fault them for that. But you as the business owner/manager and lessee have the total ability to ensure that profit is... reasonable. That’s because FMV leasing gives you the option of purchasing, returning, and even upgrading the asset when you are dealing with the right lease company. Capital leases of course offer a purchase option also, which lowers the monthly payment until that ' ballooon payment ' at the end of term. That ' bargain purchase option ' is why many company defer to the capital leases and their respective benefits.
If you're focused on understanding both benefits of a capital lease, as well as operating Lease options for assets financed in Canada speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in achieving your financial goals in asset acquisition.
