Do Canadian Banks Provide Equipment Loans and Lease Financing? By Stan Prokop- 7 Park Avenue Financial
The leasing industry in Canada has historically been dominated by a number of different types of entities that provide equipment and lease financing to Canadian business.
The types of firms that are the key players in lease financing in Canada can be broken down into the following categories:
Life Insurance Companies
Credit Union leasing firms
Third party Independent Finance Companies - Canadian owner
Third party Independent Finance Companies - Subsidiaries of American firms
Captive Leasing Companies
Bank Leasing entities - Subsidiaries of divisions of Canadian banks
We would venture to say that probably 90% of Canadian business owners and financing managers think of ' Third Party Independent Finance Companies ' when they are looking to source lease financing for their equipment and capital expenditure needs.
Canadian chartered banks have moved in an out of the Canadian lease financing industry over the years. Currently only two the Big 6 Canadian banks have full fledged separate lease entities that actively market lease financing to their customers. In our opinion the reasons customers choose a bank lease financing entity are as follows;
Pricing
Existence of a Current Banking Relationship
Dollar size of transaction
Let's elaborate a bit on those points. Because banks are in the position of having the lowest cost of capital in Canada for business financing rates on bank leasing deals tend to be excellent. On average we would observe that rates on larger deals tend to be 3-4% over the Canadian prime rate. This is excellent pricing, as independent firms tend to price at 4 to 5 to 6% over the Canadian prime rate. That is on average of course because every customer's credit quality and situation is unique.
Business customers have bank lines and term loan arrangements with their bank. So it is a natural logical extension that they would discuss their needs with their banker, who may, or may not be able to offer a lease financing solution. We indicated that only two of Canada's chartered banks have full fledged lease entities. Some of the other banks have leasing division, which are much smaller and more specialized in size, and some banks choose to ' partner ' with third party independent finance firms that are both Canadian or U.S.owned.
We also referenced dollar size as a key factor in a customer choosing a banking lease arrangement. Banks in Canada have virtually unlimited capital, so they certainly can choose to finance any amount they choose.We say unlimited capital, that is a bit of an exaggeration but Canadian banks are currently viewed as some of the strongest in the world re their own credit ratings and capital ratios.
Banks are traditionally a bit slower to enter into the lease financing area, and banks use the function in some respects to develop new corporate banking relationships. In fact we have observed that in the 2009 and 2010 banking environment in Canada the bank lessor in fact attempt to develop a full corporate banking relationship with customers who approach them for lease financing needs.
Leasing is a good source of profit for the banks - the banks tend to make solid credit decisions on assets and corporate credit quality, and lease pricing provides some nice yields compare to some other parts of their business.
Some banks in Canada have, in the past, purchased some of the private independent Canadian lease companies that were getting large and successful or had a specialized market or geographical niche... Banks are often quick to sell portfolios and eliminate leasing divisions when they feel that market conditions suggest that.
In summary, the Canadian leasing landscape is made up of a number of market participants. Banks play a key role, but not a dominant role in the industry. Lease financing via a bank is often a relationship driven arrangement with the business customer's current incumbent bank. Banks who participate in lease equipment financing have excellent rates but higher credit and asset requirements. Business owners are cautioned to source the assistance of an experienced leasing advisor to determine which leasing arrangement (bank or non-bank) is best for their needs.
What Happens to Canadian Equipment Financing Assets at the End of My Firms Equipment Lease? - By Stan Prokop - 7 Park Avenue Financial
Billions of dollars of assets are financed via leases every year in Canada.. What happens to these assets at the end of the lease, and how are some of the asset disposition and sales issues handled by your firm or the lessor? Let's examine some of the facts relative to the Canadian marketplace for equipment financing.
Naturally a significant amount of time is spending at the inception of leases in determining the new or used value of equipment to be leased. In cases where used equipment is being financed there is a need for appraisals and inspections, which are usually performed by independent third parties who have a strong sense and professional experience in valuing these assets. In certain cases where a lessor has repossessed equipment and the asset is for sale then an appraisal is also a very valuable tool.
At the end of the lease, depending upon the structure and type of the lease, the business owner or financial manager must enter into negotiations to address the final disposition of the equipment. We must remember that your firm entered into what is known as an 'operating lease 'you have in fact opted to 'use' equipment, rather than 'own 'it. That of course infers equipment being returned to the lessor, or, per the terms of your contract, it can be purchased. Purchasing equipment at the end of a lease has significant implications for you around the value and use of that equipment. Naturally if you intend to simply return the equipment the lessor is chartered with disposing of that equipment.
We also note that it is a prudent business decision for Canadian business owners to monitor the value of leased assets through the term of their lease, especially important as the lease approaches termination. As the lease approaches its end of term the lessor may also invoke its right to inspect the equipment, suggest return provisions, and, most importantly to the Canadian business owner, start to suggest the purchase price of the asset if in fact your firm wishes to keep the asset.
From the lessors perspective it wants of course to ensure a reasonable and proper value of the equipment. A major term in Canadian equipment lease financing is a term called 'fair market value '. That term suggests that the asset under lease has a value to someone in the marketplace assuming there are a willing buyer and a willing seller.
The business owner or financial manager will want to look back at the asset and understand any upgrades or maintenance that was performed on the asset. Business owners are encouraged to look out into the marketplace and determine what current values are - the internet has become a fabulous asset to lenders and borrowers in assessing the true market value and availability of many asset types. There are hundreds, perhaps thousands of used equipment dealers, brokers, and remarketers who can provide solid input into the value of the asset. Naturally contact several sources rather than one is a prudent action for both the lessor and the Canadian business owner.
As information is gathered the true value of the asset will emerge.
In summary, as a general rule it is incumbent on the lessor or finance firm to ensure proper diligence and procedures around assets coming off lease. The lender want to ensure they are made whole on the transaction, as leases are a combination of interest charged and asset realization at tend of term. For the Canadian business owner proper care, maintenance, and on going valuation of the leased assets is a valuable investment in time and cost. This investment becomes more important as the business owner evaluates disposition options at the end of term.
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How to Get a Government Small Business Loan in Canada - By Stan Prokop - 7 Park Avenue Financial
Most Canadian business owners and financial managers are not aware that if they have been 'refused 'a loan by a Canadian chartered bank that they can still apply, (to that same bank!) For a government guaranteed Small Business Loan.
We have observed this loan is called a number of things by a number of people -Borrowers refer to it as an 'SBL '(Small Business Loan), or a 'government small business loan. Bankers tend to refer to it by its more formal and legal names, the BIL loan, or the CSBFL.
Whatever you want to call it, the loan is a great part of the governments focus on assisting business with financing.
So how do you get the loan, and what's involved?
Although the loan is directly guaranteed (90%) by the government, the loan is actually administered by the Canadian chartered banks. The government emphasizes that they like the banks to participate in this program, and the government guarantees to the banks the 90% of the loan amount.
The biggest issue, we think, with the program, is the misconceptions that come with the program - business owners think they cal get a 'line of credit 'under the program. This is not the case. In certain instances the program tends to be confused with another program called the COMMUNITY FUTURES program. This is a separate program that is funded by certain economic regions to promote employment and business in that particular area or geography. It tends to be a bit more 'rural 'in focus. Again, we emphasize, the Community Futures program is not the government guaranteed Small Business Loan. (In the U.S. our government loan is called an 'SBA' loan, as it's administered by a separate organization set up by the government).
So, who qualifies? Hopefully your business! You must have revenues under five Million dollars per annum.
So when should you proceed - We would recommend right now, not when your venture is in desperate need, at which point your chances might be less than successful.
What is the 1 Million dollar issue on the program?! It's as follows - Dealing with banks and paperwork requires proper preparation, detail, and you need to allow for some reasonable time frames. That is your 1 Million dollars worth of advice!!
So what are those key next steps? Ensure you have a crisp financial package - balance sheets and income statements, your personal financial statement of net worth (more on that in a moment) and a clear business plan and summary of your business, the funds needed, and the purpose of the loan. A proper description of any assets being purchased (quotes / invoices, etc) helps also.
The application must re handled by a Canadian bank. Here is where we recommend that if you either don't have a banker, or if you don't have a strong relationship with a bank/banker that you used the resources of a business financing advisor /expert in this area. The nominal fee you might pay this person (1-3% usually) is worth its weight in gold if they have solid contacts and experience.
In our experience many government small business loans are not automatically approved on the first time - they are in fact reviewed and adjudicated by people at the bank that you will never meet. So be prepared to enter into healthy dialogue on any questions or issues that might come up! It is not unusual to go back and forth a bit clarifying any of your issues that might have come up in the application.
So whets the bottom line? It's as follows: this is a solid government financing program. Business owners should understand it's administered by the bank, but not run by the bank, so to speak. Prepare a good package, if you can't, enlist an expert. And be patient, and hopefully those government funds will be 'flowing 'into your firm shortly?
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