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What Mom Didn't Tell You About Leasing Equipment For Business And Lease Finance Options

Guest post by: Stan Prokop

Article Overview: Information for Canadian business owners and financial managers on leasing equipment for business , how to tell what rate you are being charged, and ensuring lease finance options are utilized for maximum benefit .

What Mom Didn't Tell You About Leasing Equipment For Business And Lease Finance Options

And you thought you knew it all! Did you ever think that leasing equipment for business was a straightforward process... you almost couldn't go wrong? In reality your lease options and who you deal with in this area can make or break good or bad financing decisions.

We're going to cover some lease basics for you, and we'll let you in on some inside secrets to the trade. We have often told our clients we're not impressed by the ways in which some industry participants create a smoke and mirrors scenario around some of your most important lease financing acquisitions.

We think they are wrong, but most of the time our clients are only focused on rate. That's not a good thing necessarily, because in reality pure math analysis will more often than not show that leasing is a bit more expensive option. The actual reasons you chose to lease probably should be more focused around the two types of leases available, and which one is right for your firm.

Alternate decisions to lease are driven by, guess what...? Credit approval (leasing approval is easier to obtain) and the managing of your payments in a predictable fashion related to your cash flow. An if you are in a technology business you're most concerned with the fact that you have 3 or 5 years to go on payments and your asset is depreciating, or become obsolescent a lot faster.

Don't forget also that many small, what we can call ' service features ' come with the lease facility. They include the ability to include taxes on your payments, bundle in warranty and maintenance, etc.

Is it possible to figure out the exact rate you are being charged in a lease? As we said, it shouldn't always be about rate, but the answer is ' yes'... you can figure out what the interest rate is.

How do we do that then? Relatively simple, if you have the fool. The parts of any lease calculation are term of lease, amount financed, the final obligation or future value, the interest rate, and the payment. If you know any four of those you can use a financial calculator to calculate the 'real' rate the lessor is using. For example, you are leasing 50,000$ for 3 years and you own the equipment at month 36 you are told, and the monthly payment is 1600.00$. By entering those 4 into a financial calculator (a real financial calculator) you can see that the rate is 10%.

Let's stay with our client's fixation on rate. Is that 10% high, low, acceptable, competitive? More often than not it's a competitive number because the entire industry has to stay competitive to be in business. A better question you never asked is what rate your lease company borrows at in order to allow leasing equipment for business such as yours. If they can borrow at 5% they are making 5% on you... if their cost to borrow is higher... and in most cases it's higher than you think, they are making less.

Let's share another of those secret strategies not commonly known. Your firm has a lease... it's for 50,000, for three years, and the monthly payment is 1600.00 and you. Our firm has the same lease, but our monthly payment is 1480$. How could that be, ask clients. Or they will bring us two quotes for the same asset with those same differing payments. The answer is that one lease is an operating lease, structured as a rental, and the lower payment simply means the lessor is going to get the equipment back at the end of the lease - sell it, and recover the shortfall (hopefully) on the lower payment you have been making.

So... is it all smoke and mirrors when it comes to lease finance options. It doesn't have to be. Does your homework, compare apples to apples, and speak to a trusted, credible and experienced Canadian business financing advisor in the lease financing area.

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Article Tags: lease finance options, leasing equipment for business



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