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YOUR GUIDE TO EQUIPMENT LEASING
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Financing & Cash flow are the biggest issues facing business today
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7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
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Equipment Lease Financing In Canada. When companies borrow from banks and other asset-based lending firms there are, almost always, certain covenants that are put in place to ensure the lender's comfort with the financing. These covenants tend to be financial ratios (we can call them 'number relationships') that would allow a lender to get some sense of early warning that their loan may not be repaid.
3 TYPICAL LENDER COVENANTS
The most typical covenants the lender's place on borrowings tend to be:
- Working capital guidelines
- Total debt versus total equity in the company
- Cash flow coverage - i.e. the company's ability to generate cash to pay the loans.
When these covenants are broken discussions ensue with the bank and the company!
EQUIPMENT FINANCING IS FREE FROM THOSE BANK COVENANTS AND RATIOS!
Leasing and equipment financing, as a borrowing strategy for small business , 99% of the time we feel, eliminates the additional risk a company takes when borrowing on equipment. All types of equipment, new and used may be financed, including your technology needs.
That is to say that lease companies in general, to not insist on those same restrictive covenants that the bank does. We can therefore make a statement that the company has a greater feeling of independence when it enters into a lease financing arrangement for the cost of the equipment needed.
Why does the lease company not require those restrictive covenants in equpment leases? That is probably for two reasons - the first is the fact that leasing rates are, in general, higher than bank rates, so the lease company reflects their risk in pricing. Many times the leasing firm will also ask for a deposit or advance payment to further augment our above point.
EQUIPMENT FINANCE COMPANIES ARE EXPERIENCED IN COLLATERAL FINANCING SOLUTIONS
And at the core of why the lease company does not insist on restrictive covenants is the fact that most lease firms have very strong asset experience and are generally comfortable with collateral. As we can all imagine, bankers can't be expected to have a strong sense of equipment valuation and remarketing - they are of course more 'numbers' oriented - relying on the balance sheet and income statement to predict payment, not the value of the asset.
ACQUIRING EQUIPMENT NEEDS OUTSIDE OF YOUR BANK ARRANGEMENTS
In summary, leasing as an alternative form of finance allows a firm to acquire equipment without additional concern over lender covenants and ratios more commonly associated with banks - outside of your company's line of credit. It's conservations of capital with lease payments you can budget for.
Small business can access good interest rates for their borrowing needs. Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your asset finance needs.
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Stan Prokop
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