YOUR COMPANY IS LOOKING FOR THE RIGHT EQUIPT LEASING SOLUTION!
THE CAPITAL LEASE VS OPERATING LEASE
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In equipment financing in Canada does the term ' operating lease vs. capital lease’ mean something to you when it comes to financing assets? It should... so let's dig in.
WHAT TYPE OF EQUIPMENT LEASE SHOULD YOU USE
That term specifically revolves around the type of lease that you choose when you're acquiring fixed assets - i.e. computers, machinery, shop floor equipment, rolling stock, etc. Even your corporate jet applies here! Well, we can wish, can't we?
UNDERSTANDING DIFFERENCES IN LEASES IS KEY TO ASSET FINANCING SUCCESS
Knowing the differences in these two terms makes or breaks the ultimate finance strategy you choose when acquiring assets. And you thought it was all about the interest rate!
The type of lease you choose affects the ultimate profitability of your lease company, and that should be important as that profit is generated from dealing with your company.
WHAT IS AN OPERATING LEASE
Operating leases are all about ' using assets’... not owning them. So a significant part of the 'OPERATING LEASE' is the value of the equipment at the end of the lease - as in how it is recorded and how it is realized.
Clients are sometimes surprised at the low monthly payments in an operating lease - they shouldn’t be, as it's all part of a waiting game that kicks into place at the end of a lease term. That’s when your lease document should provide you with 3 critical options on the asset - renew, return, purchase in the operating lease accounting rules decision.
There is in fact the 4th option on occasion and that is ' upgrade' as many assets lend themselves to being upgraded to keep technology and use up to date. So that low payment we have just mentioned is simply because the lessor's profit is going to come at the end of the lease and should be treated like that.
ARE OPERATING LEASES STILL POPULAR
Operating leases are perfectly legal and widely in use. They have though lost some of their lustre due to international accounting standards which have affected how they are recorded on your balance sheet. In past years they were a great way of hiding debt on the balance sheet unless the reader took the time to peruse footnotes in financials – which most people don’t/didn’t! Lease payments are always lower in a capital lease due to the residual position taken by the lessor. Consider these issues when you purchase an asset for your business, technology financing being a good example.
That option to purchase, not an obligation, is a key part of operating lease considerations. Over a period of time assets depreciate as a part of your financial statements accounting.
WHAT IS A CAPITAL LEASE - AKA ' FINANCE LEASE'?
The capital lease on the other hand is all about owning assets... So the profit generated by the lease company comes solely from the interest /finance rate on your transaction. So your capital ' lease to own' is all about fixed monthly payments. Capital leases can be written with bargain purchase options , not to be confused with a fair market value option. This is where lease accounting is important to understand, ensuring how you understand the effect on the company balance sheet around the value of the asset.
However, capital leases can be structured in many ways to seem like a lower monthly payment - one of those strategies employed by both you and or your lease firm partner is creating a transaction that has a bargain purchase option - it’s in effect a balloon payment due at the end of the lease. Therefore monthly payments are low and the ' balloon payment' at the end of the lease term can be refinanced with ownership being still transferred to the lessee.
WHAT ARE THE 5 KEY PARTS OF THE EQUIPMENT LEASE CALCULATION
Many clients we meet are overwhelmed by some of the confusion in terms of equipment financing. The reality though is that there are only 5 parts of any lease - the term, the rate, the payment, the end of term, and of course the $ value of your transaction. If you know 4 of those you can do a really good job at exactly or closely guessing the other components. When you enter into a lease agreement the types of leases you consider will come into play in your calculations around monthly payments and interest expense.
Capital and operating leases require some understanding by lessees. Don't get caught in the ' lease terminology' game. If you're financing assets seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of success in financing the assets you need to keep your firm profitable, successful, and growing when considering lease or finance.
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