Equipment Leasing is a Major Source of Business
Financing
If you are like a growing number of Canadian
business owners, equipment leasing is not only an option
to consider, but in many cases, the best choice for
business financing.
After real estate lending, equipment leasing is the
largest type of asset based lending and is steadily on
the rise. Today, you can lease almost any type of hard
asset that can be utilized in your business. Everything
from computers and office furniture, to heavy duty
equipment and motor vehicles can be eligible for lease
financing.
Leasing programs are normally focused around a
certain type of assets where the Lesser has developed a
system for effectively determining the value of a new or
used asset, and the pathway to liquidation in the event
of default of payment.
Before I go any further, I need to provide some
definitions.
In a leasing arrangement, the leasing
company (Lessor) purchases an asset and provides the
asset to the business owner (Lessee) for business use in
exchange for lease payments.
So, in effect, the lease
company is like a bank, but instead of you making a
principle and interest payment, you make a lease
payment.
There are pros and cons to leasing versus buying that
need to be assessed when making a buying decision.
But,
in basic terms, a lease arrangement is a viable form of
financing. In the past, business owners have considered
equipment leasing to be a higher cost and higher risk
type of financing, but that has changed considerably.
Here are some of the main benefits of leasing.
Access to Capital
• Equipment leasing companies can finance a single asset
purchase in many situations where a primary lender would
not extend additional capital.
• Equipment leasing companies can purchase existing
business assets which other lenders have no interest in
lending against, and provide a lease in return, turning
equity into reusable capital.
• For many types of small to mid sized assets, the
equipment leasing process can be completed in as little
as a single day.
• Equipment leasing companies tend to work closely with
vendors by providing the vendors with onsite programs to
accelerate the closing of the sales process.
• Because of their intimate understanding of the
liquidation process, leasing companies tend to be able
to finance a larger percentage of the asset purchase in
situations that cannot be primarly approved on the
strength of personal net worth and credit.
Cash Flow
• Operating leases can potentially be structured to
reduce the amount of monthly debt servicing.
• For new asset purchases, the initial cash down payment
can be lower for a lease purchase.
• In cases of business downturn, sale and lease back
agreements allow business owners to the generate working
capital necessary to keep their business operating.
• Operating Leases allow the Lessee to turn back the
equipment to the equipment leasing company for disposal
or resale, versus having to manage a disposal process
where the result and financial impact are unknown.
• Operating leases are normally tax deductible,
potentially reducing the amount of business tax and the
related income tax installment payments.
In performing a lease versus buy analysis, you would
normally take into consideration things like:
• Taxation implications
• Cash flow implications
• Operating Lease versus Capital Lease
• Cost of Capital
• Flexibility.
Even with the most rigorous analysis, the decision may
be a lease by default as in some circumstances equipment
leasing will be the only available option.
I mentioned earlier that part of the reason in the past
for equipment leasing not to be considered as a viable
financing source for many business owners was higher
effective interest rates than conventional loans. Today
effective lease rates are still normally higher than
bank rates for similar equipment financing applications,
but the financing cost spread has narrowed considerably.
At the same time, rates are relevant to risk. Higher
risk deals command higher effective borrowing rates in
order to cover off the risk of default.
The good news for SME’s is that there is a very broad
range of leasing companies offering equipment leasing
products that cover a very broad spectrum of equipment
types and risk levels.
The bad news is that it’s not always easy to find what
fits your particular equipment leasing needs. Many
leasing companies either don’t have internal retail or
their own retail is very small.
In these cases, the lease companies rely on lease
brokers and referral networks to source potential
customers for them. Unless you have a straight forward
leasing scenario, it can be difficult to find the
leasing company that will provide the financing you are
looking for.
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