No one said it was easy, that’s for sure. We’re talking about the challenges Canadian business owners and financial managers face in business financing, specifically asset acquisition. So why does 80% of Canadian business utilize the lease of equipment as the solution to that challenge? Let’s look at equipment financing and lending as your stop gap to acquiring those new (or used) assets.
When you make the investment decision to purchase any asset for your business the ability to put together a lease agreement to match the useful life of that asset becomes puzzling sometimes. What type of lease and term is best?
Probably the best advice we can give clients is simply to make a reasonable assumption on the useful life of the asset and match the lease term to that same assumption. The quick example is of course not to use a 7 year lease to own scenario if you are financing a computer system. (Unless you’re buying your computers at a better place than ours, we don’t seem to have generated 7 years from our last system!).
The other part of that equation is simply two worlds, ownership, or use. By focusing on those two elements you now have the ability to choose either a capital lease (ownership at end), or an operating lease (return or upgrade at end of term).
And those same two lease decisions can yield cash flow benefits, as well as accounting and tax implications that will work best for your firm.
It’s probably just us, but we sometime intuitively feel that 99% of client looking to lease make that decision to conserve working capital. The lease of equipment is simply the answer to the lending question you’ve been facing – ‘˜How can we acquire the most amount of asset for the smallest amount of cash?”.
The variety of assets in asset lending and leasing finance is endless. From a small photocopier of lap top to a major piece of production equipment on your shop floor, they all can be financed.
It’s not unusual to view client thoughts on the lease of equipment as simply short term or temporary. But what is the shortest term you can lease an asset for? In the Canadian environment that term tends to be 2 years. Why 24 months. The honest answer is simply that it’s not really economical or profitable in the lending environment to lease an asset for a period less than two years. So now you know!
Many clients further enhance a shorter lease term by choosing an operating lease – recall that it is our lease to ‘ use ‘ strategy, which works best with assets not ultimately required by your firm, or those that have a lot of technological obsolescence attached to them. There are some accounting rules that need to be met when you are trying to achieve a pure operating lease, so it’s often best to talk to your accountant when structuring such a transaction.
At the end of the day the lease of equipment as your business financing strategy has to make sense from an overall viewpoint of rate, term and structure. Your firms own credit worthiness already determines your rate- you just have to ensure the lessor has the same opinion on credit worthiness as do you! And we’ve given you the ammunition on how to focus on term and type of lease already, so you’re set.
So is equipment leasing the ‘ holy grail ‘ of business financing in Canada. We’re not saying that. but, remember, 80% of all business is doing it, so that has to mean something. For expert advice, guidance and solutions on business financing via equipment lending consider speaking to a trusted, credible and experienced Canadian business financing advisor who can provide you with guidance for a proper asset finance solution.