Looking for the best deal in town on Equipment lease rates in commercial leasing asset acquisition ? Our clients ‘ interest ‘in getting those best rates is always somewhat amusing to us. Why? Simply because the ability to understand how lease pricing is derived is not always clear to Canadian business owners and financial managers.
Lets examine some of the key factors that drive your final pricing and how you can have a very direct effect on the assets you finance and the price you pay – as always it seems to always come down to that ‘ monthly payment ‘ – so lets demystify that process .
First of all many business owners never take the time to look at their alternatives when it comes to equipment leasing of their fixed assets. Two key issues come into play here, one is simply they type of lease they enter into (there are two types – do you know which is which) and the second is understanding what the 5 (yes five!) components are of a very simple lease calculation.
Back to point # 1: When you are making that lease versus buy decision make sure you evaluate your alternatives. The key alternative to lease finance is one in which you might consider a bank term loan, or alternatively purchasing the asset out of your operating cash flow based on existing credit lines that are in place. But quite frankly the reason you are reading this in the first place is that you have already decided that commercial equipment lease financing is in fact the best method of asset acquisition – at this point you just want a good deal . So we’re assuming you have done your lease vs. buy analysis and are focused on our core subject today – a great lease rate and structure!
Getting back to those 5 key elements in lease financing pricing – what are they? They are simply as follows – the term of your lease, the interest rate being charged by the lessor, the value of your transaction, the future value of the lease, ( i.e. what happens at the last payment ) and out of that falls nicely # 5 – your monthly payment .
Many business owners, and are we say, financial managers don’t use a financial calculator. If you have access to that type of calculator you can simply input either your data, or assumptions on any of those 4 critical data points and out will pop the last piece of data that completes the commercial leasing pricing and structure.
Quick example – lets say you are leasing an asset for $100,000 – you want a 5 year lease, you think your lease interest rate should be about 8%, and you want to own the equipment at the end of the lease. Congratulations, you have just quantified 4 out of the 5 data points – Enter those into your lease calculator and you will see that the monthly payment is 2014$.
But wait, let’s say you can only afford 1500$ a month and you have done your analysis on the payback of the asset. Enter 1500$ into your lease calculator and it will show you that to achieve that lease payment the term must be 88 monthly, not 60 months .
Getting the point – its a simple one – understand that if you know the key elements of your lease inputs you can manipulate that info to achieve either the best rate, the best monthly payment, the optimal term of the lease, etc .
The type of analysis we have just done relates to a capital lease transaction – remember we spoke of two types of leases. If you want an operating lease (i.e. use, but not ownership of the asset) our data elements are just the same but you’ll find that your overall interest rate on the amount financed will be much lower, because the lessor and you have opted to have the lease company own the asset.
Do we even have to mention that the key driver in the actual interest rate charged is very simply the overall credit quality of your firm when it comes to borrowing.
So what have we covered – simply that you have the ability to manipulate key lease elements to drive a final pricing and structure that works best for your firm. Is there a quicker way to ensure you have all the points covered – there is! Speak to a trusted, credible and experienced Canadian lease financing advisor who can ensure you the final deal is the best deal in commercial equipment leasing in Canada.