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5 Dangers of Financing Equipment - From Technology to Machinery - Avoid These Mistakes With your finance company or leasing firm.

Guest post by: Stan Prokop

Article Overview: Information on financing equipment in Canada and the dangers firms face when financing machinery or other assets and technology with their finance or lease company .

5 Dangers of Financing Equipment - From Technology to Machinery - Avoid These Mistakes With your finance company or leasing firm.

You've seen the sign - it reads ' Danger Ahead ' !No we're not talking about a curve in the road but rather discussing 5 key areas where Canadian Business makes thousands ( or millions ?) of dollars in poor judgment around critical areas of financing equipment via a third party finance company - and our discussion covers all assets from machinery to technology .

Let's review 5 key dangers areas in equipment financing in Canada and provide you with solid real world tips on how to successfully navigate these areas to better enhance your company's ability to maximize on lease finance company benefits.

Item 1 - Structure - Lease financing is all about structure. Unfortunately most clients we deal with only always focus on 1 of the 5 elements of a lease transaction. (By the way, those are: term of lease, lender interest rate, value of transaction, payment, and obligation at end of term)

Let's use a quick example - we'll take a sample 100,000$ transaction. On a 3 year capital lease to own scenario your monthly payment at an assumed rate of 8% is 3112$. However, if you chose an operating lease (i.e. use equipment and not own it) your payment would come in at around 2490$/mo. And if you took our first example, and either were required, or voluntarily put down 10% the monthly payment is now 2801$. Same deal, different payments. Which one is best? That is only for you to decide based upon your unique asset acquisition situation.

So interesting calcs, but what's our point you say? Simply that by understanding how the finance company utilizes structure to provide you with a ' monthly payment ' can arm you with knowledge that will ultimately translate into a payment scenario that works for your firm. Bottom line - understand how the lender views and utilizes the five elements of your final lease calculation.

Danger Item # 2- Pricing! We suppose that the late famous Vince Lombardi might say ' Lease pricing isn't everything, it's the only thing!' Sorry Vince, we couldn't disagree with you more. Your ability to match the right term of the lease with the right finance company and type of lease you choose (there are several) can pay for itself many times over . Its now always about rate and pricing because if it was always about price we would all be driving low end compact cars - many of us dont , because we have financial options and alternatives . And by the way, its a competitive market , so by positioning your firms credit quality properly you will always receive a competitive rate .

Danger - Item 3- Credit approval . Most clients simply aren't aware of how to position their financials properly in financing equipment . Whether you are acquiring heavy machinery, construction equipment, or high end software applications you need to understand what drives credit approval . Those factors are the asset you are financing, your historical cash flow, your current and sustainable cash flow, and your ability to work with your finance company to structure a deal via down payments, outside collateral, etc that make the transaction a win win for yourself and the finance company .

Danger - Item # 4- Conditions . Its all about the fine print, but many customers don't read the fine print, As a result they are subject to thousands of dollars in misc admin fees, renewal fees, possible appraisal requirements, and most importantly early pay or termination fees . Ask your finance company or Canadian business financing advisor to ensure you understand who is paying what .

Item # 5- Our last danger point ! What is it ? Simply that financing equipment is great, but in many cases are you sure you understand all your alternatives to this type of financing . They might include an asset based loan, or even a temporary bridge loan on the asset .

In summary, financing equipment in Canada occurs everyday, from assets from 5k to 50 Million dollars . Understand the hot points of what a finance company focuses on when they are leasing machinery , business equipment, or any type of business asset you need to acquire . Unsure of that Danger Sign in the road ahead ? Speak to a trusted, credible and experienced Canadian business financing advisor for navigational assistance!

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Article Tags: finance company, financing equipment, Machinery



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Equipment leasing - Equipment leasing has many benefits, such as tax benefits, conserving money and always having up to date equipment to stay competative to name a few. Obviously, it's partially dependent upon what type of business you have as to whether you will benefit more than someone else but... Do you think it's worth leasing your equipment rather than purchasing it? Can you think of any other reasons you can benefit from it or any reasons this is not a good idea?
Collateral security required - You will have to use your home and anything else you own for collateral on a business loan. The SBA will require you have at least 2 years in the same industry as the business you want to open. Banks will want more money down (30%) and real property as collateral, and will probably charge higher rates and require a 5 year baloon. More and more credit unions are getting into commercial lending and tend to be a little more friendly than banks. Non-bank lenders can offer a nice alternative. They typically require less money down (10% in many cases), rates are usually variable (tied to prime like 2 to 3% above), are more willing to accept equipment as collateral, but expect a shorter term as a trade off for the risk (ie. 5 to 7 year term). This can make it difficult for some to afford the loan payment. Yet another option is a leasing company. There are many leasing companies that will finance franchise purchases and expansions by writing the whole thing up as an equipment lease. (200K) is not out of the question. They might require 10% down, but as long as they have a first position on all the business assets they are quite willing to set you up with a lease. The downside is that your cost of financing (the leasing co. won't call it interest) will be higher than any type of loan. When figuring you cost remember that many states require you to pay sales tax on the amount of your monthly lease payment. Also consider the buy out terms at the end of the lease period. You'll want to stay away from market value buy outs. Go for the $1 buy out. If you have enough equity in your home, you might be better off taking out a home equity loan and using that to finance your business.
Who's best for first time commercial loan? - You will have to use your home and anything else you own for collateral on a business loan. The SBA will require you have at least 2 years in the same industry as the business you want to open. Banks will want more money down (30%) and real property as collateral, and will probably charge higher rates and require a 5 year balloon. More and more credit unions are getting into commercial lending and tend to be a little more friendly than banks. Non-bank lenders can offer a nice alternative. They typically require less money down (10% in many cases), rates are usually variable (tied to prime like 2 to 3% above), are more willing to accept equipment as collateral, but expect a shorter term as a trade off for the risk (i.e. 5 to 7 year term). This can make it difficult for some to afford the loan payment. Yet another option is a leasing company. There are many leasing companies that will finance franchise purchases and expansions by writing the whole thing up as an equipment lease. (200K) Is not out of the question. They might require 10% down, but as long as they have a first position on all the business assets they are quite willing to set you up with a lease. The downside is that your cost of financing (the leasing co. won't call it interest) will be higher than any type of loan. When figuring you cost remember that many states require you to pay sales tax on the amount of your monthly lease payment. Also consider the buy out terms at the end of the lease period. You'll want to stay away from market value buyouts. Go for the $1 buy out. If you have enough equity in your home, you might be better off taking out a home equity loan and using that to finance your business. I hope this helps.
Proper planning to get investors - Investment is very easy to get once you have the complete idea show it to the local finance company, they can get you investors with a basic fee, since they know your business and status etc, also local presence of finance firm will help investors feel easy to check on growth of you business. It will be difficult to get direct investors for your business without proper planning and reports.
Re: Kevin's Case Study #8 - How do you attract a finance expert? - I think the best way to find any reputable accountant would be by recommendation. If you cannot get one by recommendation then you should put those you narrow down your search to through an in depth prescreening process. Check the out their firm with BBB and make sure they are licensed & registered. Always check credentials and make sure they graduated from the schools they claim to have attended. Financing should be found in accordance to the type of financing you need and the type of business you are financing. You should always get prequalified before commiting to an application. You should seek out those financial institutions that specialize in the type of financing you are seeking and then check to enure they can finance your type of business.


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