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Leasing finance in Canada. Just how important is the issue of ' lease documents ' when it comes to equipment financing in Canada. When you speak to companies who have encountered what we can diplomatically term as ' issues ' in the past with their lease transactions you just might find that a lot of those issues revolve around key terms and obligations in your transaction.
Let's examine 5 of those key points, with a focus on protecting your rights in the transaction with a fair lease transaction - because at the end of the day also those same issues have to be fair and make sense to your lessor.
We would also point out that many of these issues can be negotiated and that’s important for the Canadian business owner and financial manager to know.
First of all it makes great sense to consider signing one master lease with your leasing company of choice. Why? If only for the issue of saving time and money, as this type of document addresses once and for all, the terms of all future lease transactions. Larger transactions will tend to always have a 'master lease' scenario in place anyway given the complexity of a larger transaction. It's not all that complicated, but many firms might want to have their lawyer look the document over once, as it identifies the rights and obligations of both parties and describes the financial terms of the deal.
Second issue today... warranty. Make sure you understand your warranty rights on any asset you purchase. Many Canadian business owners/ managers confuse, mistakenly, the finance firm as their 'vendor‘. That is not the case... they are financing the transaction for you, not providing a warranty. It gets very complicated, and somewhat ugly, when businesses withhold payment to their lessor for product defect issues.
In Canada there are two types of leases essentially when you enter into a lease contract - a capital lease (lease to own) and an operating lease (lease to use). Capital leases typically have what is known as a 'hell or high water' clause in them which basically means that you agree to make your payments, no matter what!
The third issue to watch out for is the issues of liens and registrations against any asset you purchase. This typically is not a problem is you are purchasing from a legitimate vendor, but leasing finance in Canada also means you can finance used equipment - so it's critical that you ensure that you and the lease company have clean title to the asset.
Fourth issue today - taxes. Lease payments in Canada will include the provincial and federal portions of tax due on the monthly payment amount. Don't forget to budget these into your cash flows. This issue brings out a positive advantage of leasing finance in that your taxes are in effect financed, unlike a loan type transaction.
Our final issue today is the issue of use and return requirements. Examine carefully your obligations around the type of condition you must return the asset in when your transaction calls for an asset return to the lessor. And make sure the location and costs involved around that make sense to you the lessee. If you are entering into an operating lease and have the right therefore to extend the transaction or purchase the asset it just makes sense to maintain the asset properly.
Bottom line; don’t forget the ' terms ' part of any leasing finance transaction in Canada. Issues not addressed now will be costly and time-consuming later.
Speak to a trusted, credible and experienced Canadian business financing advisor on assistance with lease documents and issues that protect your firm and enhance the true value of leasing in Canada.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
