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 –
1. What can be financed?
2. What are the type of leases and rates available to my firm?
3. What is the best way to obtain a prompt approval at the best rate, 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. And, furthermore asset financing in Canada definitely includes the financing of used equipment, which is 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. We add two critical cautionary items of note here – in certain cases and appraisal or asset valuation or inspection might be required if the asset is new, and in many cases a down payment might be required on a used piece of equipment. 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 very useful economic life after a typical usage of 3-5 years, for example thing production equipment, etc. In many instances, especially with the use of the internet and auction sites pricing on used equipment might be exceptionally favorable.
One other solid tip is to get your lease financing approved in advanced, 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.
Let’s move on to our second point, which is simply 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 simply we will simply 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 the choice of lease type should be driven by your final motivation with the asset. By that we simply 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, although 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 we 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 end of term – you can return, purchase, or upgrade. Actually there’s a fourth option, which is simply to agree to extend the lease for a pre agreed upon amount of time.
Let’s move on to our final point, which is simply – You have made the decision 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. 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.
In summary, arm yourself with some critical knowledge of lease financing and you will be rewarded with the knowledge that you have chosen the best financing method for the acquisition of new and used equipment and business assets in Canada.
