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Lease Financing in Canada - Why is it a solid Financing Alternative ? - By Stan Prokop - 7 Park Avenue Financial
Financial Managers and business owenrs in Canda continuously find they are competing in a difficult and challenging economic environment. Equipment Financing and Capital expenditure issues are top of mind when Canadian firms are looking to grow and prosper. Revenue generating assets are important to any business.
When large corporations report their financial the analysts out there focus on Free Cash Flow. This is the cash flow that is left after a company totals their net income and depreciations and subtracts what they have spent on ‘capex’, or capital expenditures.
That free cash flow is of course what’s left to pay shareholders and run the business. But small and medium size firms have a huge challenge in generating free cash flow per our formula above. They more often than not don’t have the luxury of paying cash for much need new and revenue producing assets.
That is why Canadian firms should be looking at Lease financing as an essential asset acquisition and cash flow tool. Let’s do a quick recap on the major benefits of lease financing:
• CASH FLOW - Canadian businesses can conserve working capital and invest those funds instead in receivables and inventory for additional growth – Also firms want to achieve the benefits of these newly acquired assets over time without having to pay for them all at once on day one
• TAX BENEFITS – Lease payments of course can be expensed and are generally more advantageous from an accounting viewpoint than a loan
• BETTER ASSET MANAGEMENT - Every firm wants to stay ‘leading edge ‘on asset acquisition, with respect to items such as computers or plant assets. At the end of the term of the lease the Canadian business owner or financial manager has a number of options available with respect to asset disposition
• OFF BALANCE SHEET FINANCING - Depending on the final structure of the lease a transaction can be recorded off your balance sheet – you are in effect using the equipment, gaining the benefits, but not owning the equipment.
Those are some of the more ‘technical ‘reasons for lease financing in Canada. Do the overall benefits of this financing alternative end there? They don’t! On balance the lease financing process is one of the simpler and easy ways to acquire assets – it also requires not large cash outlay, and your bank lines stay intact. Canadian business owners have huge challenges in maintaining bank lines that are adequate for their business – leasing alleviates part of that challenge.
What can be financing – the better questions are of course a shorter answer – what can’t be financed. Almost any asset can be financing in Canada if its core to your business needs – That includes of course technology, vehicles, machinery, production equipment, tooling, telecom assets, agricultural assets, and construction assets. Again, to be clear, if it’s a hard asset it can be considered for lease financing!
As business owners in Canada we want the right equipment at the right time in order to stay competitive and profitable.
Is leasing the only financing alternative available to the Canadian business owner or financial manager – definitely not. Should it be understood and considered? Definitely so!
Do you want to grow your business, but need financing for the equipment to do so?
If you’re thinking about acquiring more equipment for the purpose of increasing your business size, but aren’t sure how you will be able to afford it, 7 Park Avenue Financial has the professional solutions you need for your specific situation. Over the years, we have originated millions of dollars in financing for our clients, along with the track record to show it.
Does Equipment-Lease Financing Affect My Firms Loan Covenants?
When companies borrow from banks and other asset based lending firms there is, almost always, certain covenants that are put in place to ensure the lenders 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.
The most typical covenants the lenders 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!
Leasing and equipment financing, as a borrowing strategy, 99% of the time we feel, eliminates the additional risk a company takes when borrowing on equipment. 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.
Why does the lease company not require those restrictive covenants? 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 lease firm will also ask for a deposit or advance payment to further augment our above point.
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, banker 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.
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.
We pride ourselves on the relationships we’ve built at many financial institutions with senior level managers, and we are able to approach these top decision makers with our clients’ financing concerns. In fact, 7 Park Avenue is based on relationships, because we believe personalized customer service is the only way that we can meet your specific financing needs! We’re experienced with Mississauga Ontario equipment financing, and we want to take your unique needs for equipment and match you with the ideal lender for your business.
Our customer-oriented approach to equipment financing is just one of the ways that we can help you avoid the costly delays that can arise if you were to be matched up with the wrong lender for your business. We believe that these situations, often caused by standardized cookie-cutter solutions, are unacceptable and unnecessary. That’s why we listen, learn, and then apply that knowledge to find the solution that works for you.
Equipment Leasing and Financing, All Industries
For the equipment leasing and financing industry in 2008, economic times were no different than most U.S Industries. The transaction and sale volume as a whole was rapidly declining as we draw to the close of this year. Many lenders, lessor/brokers were either in an illiquid position or possibly out of the business due to the declining economic times.
As gas prices and the rate the federal reserve charges it best customers have gone down, the interest/rate factors charged by lessors have not. The combination of the down payment, the additional lending requirements and the high cost of borrowing money has depressed the leasing industry..
In addition, the lenders/lessors in 2008 have seen record repossessions and they have assumed a tremendous amounts of additional repossessed inventories. These problems combined with the difficult economic times has changed the leasing industry as we have recognized it in the past.... Many lenders have had to focus on their repossessed inventories instead of normal business due to cash flow demands, out of balance credit lines with their own lenders, and competing with other lenders for the small supply of buyers in the market place.
In the prior better times, there were many application only programs up to $250,000 and $150,000. This meant there was no financial statements, tax returns or bank statements required. Today, there are less application only lending programs available, or the available programs require more information and their rate factors are higher than before. Due to problems in the industry, many lenders have gone back to more conventional lending requirements. . These lending changes have a tremendous impact on normal business for marginal credit buyers, startup businesses. and more mature businesses. One interesting area that has arisen out of this economic downturn is dealer/special financing. With all the repossessions in the market place today, buyers still have an unique business opportunity to acquire a repossession. Repossessions can be obtained with very little or no money down, sixty months to repay, regardless of age, and more favorable financing terms than conventional financing.
Since new business capital is difficult to obtain, it is suggested that the startup and seasoned business examine the repo markets. This could be a rewarding in the combination of both price and financing.
The following types of industries are examples of what we are describing here for equipment leasing and financing construction trucks and equipment, work and commercial vehicles, over the road trucking including semis and big rigs, commercial trailers including flatbed, bottom and end dump, dry van etc and all types of construction equipment, backhoes, excavators, bulldozers, dump trucks, farm equipment, forestry equipment, heavy equipment, garbage trucks, etc
If conventional isn't available to you for whatever reason, please check out the repossession market and see what deals you may be eligible for. SOURCE : JM LUNA - EZINEARTICLES.COM
mississauga ontario equipment financing
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