Don’t Commit These Deadly Sins In Canadian Lease Financing
Are there some ‘ deadly sins ‘ Canadian business owners and financial managers can make when it comes to lease financing in Canada? We think there are a good handful of them, at least 4, so let’s cove those off. More importantly, let’s talk about avoiding them and using business equipment leasing as a solid tool to help finance your business.
So, what are those 4 key areas of potential ‘ sins’ when it comes down to that asset acquisition decision? For us it comes down to:
Entering into the wrong type of equipment lease/ loan
Mistakenly purchasing the asset that in effect depreciates while at the same time providing your firm with certain benefits over a period of time
Entering into a term loan for the asset
Working with the wrong lease finance firm
The good news is that there are some great solutions to avoiding today’s ‘ sins ‘ . A good place to start is spending some realistic time around both the costs and payments involved in your transaction, as well as any balance sheet and tax type issues that you might need to consider, if not now .. down the road!
The timing of cash outflows on your lease, versus the expected benefits is a key area to focus on. This is a classic way of weighing the alternatives to leasing. This analysis offers proof you are making the right decision!
Let’s use a typical example, which in today’s case will be the acquisition of a computer, or a whole computer system, as well as all the related costs that come with that, i.e. software, maintenance, etc. That’s an area of our businesses where real cash outlays are required these days!
So what must be considered in our example? Naturally actual cost is a factor. We have often said that using a financing mechanism such as asset finance in your business in effect helps you to remove what a dear friend of ours called ‘ the obstacle to innovation ‘. So just your ability to buy the best and the most with your dollars is one great way to ensure you’re not committing one of today’s ‘ deadly sins ‘.
Other factors you should consider are the depreciation and obsolescence that comes with an asset such as this … (or any other asset for that matter … in truth some assets depreciate quicker than others – a cement truck can be leased of financed for ten years). Note to reader: We don’t recommend financing computers and related equipment over a ten year period!!
Another key point is to ensure that the type of lease you enter into covers off what the leasing companies in Canada call the residual value, or end of term. Bottom line – focus on what you intend to do with the asset at the end of the term… is there some value still? If the asset can be replaced, upgraded, or still utilized it might be beneficial to enter into an operating lease versus a lease to own type scenario.
There are substantial differences in a loan versus a lease, including areas such as payment of the taxes, down payments required, balance sheet consequences, and credit requirements depending on who you are dealing with.
So who can give you a straight answer on what lease is best for you, and when? Resources include independent commercial lease companies, captive finance firms, bank leasing companies, etc. Or perhaps a solid decision is to use a Canadian business financing advisor who has strong relationships and knowledge about all of those resources, some of whom have very vested interests to make asset financing work more for them than you.