YOUR COMPANY IS LEASING ASSETS - NEED ASSET FINANCING HELP!
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Financing & Cash flow are the biggest issues facing business today
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When it comes to leasing assets in Canada is it your turn to ' take the fifth '? We're talking about lease financing using such vehicles as the finance lease or operating lease to run and grow your business.
And oh yes, about ' taking the fifth '! That's of course the U.S. term which invokes your right against self-incrimination. When you do that you're simply saying you’re kind of guilty, don’t you think? But it doesn't have to be that way. Just spending some time understanding some key lease finance basics will put you way ahead of the game. And here are some of those basics.
THE THREE CHOICES IN ACQUIRING BUSINESS ASSETS
As a business owner or financial manager in Canada, you have basically got three choices when acquiring a business asset - they are:
Purchasing the asset
Leasing the asset
Taking out a term or bridge loan on the asset
In some cases, business owners might choose an operating lease, allowing them to capture the use and benefits of the asset, but not the obligation to own it. Monthly payments will typically be lower on an operating lease. The end of the lease options is always a consideration in buying equipment for your business.
SELECTING THE RIGHT TERM OF THE LEASE - THE USEFUL ECONOMIC LIFE OF THE ASSET
Typically our clients most often used excuse for considering lease financing is simply they would like to match cash outflows with the use of the asset over a specific period of time. In Canada, lease terms tend to be from 3 to 5 years, but they can be shorter... or longer...depending on the asset and type of lease you enter into.
UNDERSTANDING ACCOUNTING ISSUES AROUND BENEFITS OF LEASE FINANCE
There are always some key accounting issues to consider when it comes to asset financing; most of those are quite positive when it comes to leasing - they include being able to depreciate the equipment and expense the interest. Balance sheet and income statement effects of the lease finance solutions should always be reviewed and best discussed with your accountant. A capital lease typically has a 3 to 5-year lease term based on our experience at 7 Park Avenue Financial.
LEASE RATES - THE COST OF LEASE FINANCING
Lease rates; unfortunately tend to be ' top of mind ' when it comes to client decisions to lease assets. The irony is that even when some owners/managers don't even know how the lessor calculates those rates they still seem to be at top of mind. We cringe every time we hear ' what’s my rate?' if only because there are so many other factors that determine a great lease. We sometimes think instead of asking ' what’s my rate ' the owner/manager should take ' I plead the fifth' because I am not 100% sure what I am talking about! But that’s a subject for another day.
OBTAINING CREDIT APPROVAL ON YOUR LEASE TRANSACTION
One final point about the rate though and it’s simply that your credit quality is pretty well pre-determined when it comes to credit approval for the asset in questions. Smaller ticket items in Canada, often up to 50k don’t even require financial statement disclosure, but you should be expected to provide full financial disclosure for the asset you are financing.
CONCLUSION
Because the industry is so competitive in Canada even if your firm’s credit quality has some issues the benefit of leasing is that your deal can be ' structured ' to ensure approval. Structuring simply might be a higher rate, a down payment, additional supplementary collateral, etc. The one downside of leasing is that it generally is not repayable without penalty, and the best you can hope to achieve here is some sort of negotiated lower buyout amount at the mercy of the lessor. So if you are entering into a 3 or 5-year lease... caveat emptor!
So, is the lease option for your firm when it comes to asset financing. Top experts in the field indicate that over 80% of all North American businesses utilize this method of asset acquisition. Spend some time understanding your options, and seek the services of a trusted, credible and experienced Canadian business financing advisor who can assist you with your ' lease vs. buy ' decision.
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Stan Prokop
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