By Evan Carmichael on October 18th, 2011
Stan Prokop is the founder of 7 Park Avenue Financial. The firm specializes in business financing for Canadian companies in the areas of working capital, asset based lending, SR & ED tax credit financing, equipment financing, franchise financing and banking.
He’s also a Platinum author on my website – you can check out his articles here. I asked him 6 questions about equipment leasing for entrepreneurs:
What are the advantages of using equipment leasing companies?
Over 80% of all businesses in Canada use lease financing firms to acquire assets. Proven benefits of equipment finance include: 100% financing of the asset and related costs as well as a built in protection against inflationary pressures – you in effect postpone use of funds until the lease is retired in full.
Other key advantages include flexibility around amortization of the lease (typically 2-5 years) as well as the obvious cash flow consideration. Certain tax and accounting benefits also accrue to the lessee and we are always encourage our customers to perform a solid lease vs. . . . buy analysis to ensure they understand their option , purchasing the asset outright . Operating leases are becoming somewhat less popular because of international accounting rule changes on how customers show the lease on their balance sheet.
Other benefits include a hedge against obscelescence of the asset, and payment flexibility around amount and timing of payments. (Companies in seasonal industries can march cash outflows to their business cycle?
The bottom line is that there are solid benefits to using a lease finance strategy.
How can a company benefit from using other equipment leading companies?
The current Canadian lease environment for asset financing is very buoyant and competitive. Competitive translates into lower interest rates and flexibility around credit criteria and approval. By working with a solid lessor in your industry and asset size maximum benefits will accrue to a Canadian lessee,
What are the risks to avoid in business equipment leasing?
There are some potential risks in lease financing but they can be significantly mitigated. The asset end of life value is critical in the lease financing decision. It dictates the type of lease you will enter into, the term, and the actual asset remarketability is a driving factor in the final rate. Lessees also need to understand the asset needs to be insured and a certificate of insurance will need to be provided to their lease firm.
Also, having worked 25 years in technology finance I can assure readers that they need to understand indemnification risks. The leasing company is financing your asset, not providing you with a warranty, etc…so sort those issues our with your vendor .
If it depreciates and also makes your firm a profit through use you should, you guess it… LEASE THE ASSET !
How does one know if they have chosen the right equipment loan for asset financing?
That’s a great questions, because many firms don’t understand they have a choice in type of transaction they enter into. In Canada primarily two types of leases are available… lease to own and lease to use. A lease to own is typically in the industry called a capital lease, and you should plan to fully own and ultimately dispose of the asset at the end of term. Operating leases are the 2nd options, they are a lease to use scenario. An analogy we use is a light bulb for an operating lease explanation. You want to use the electricity but you don’t necessarily want to own the bulb. Operating leases have a lot of flexibility because at the end of the term you’ve got choices – you can buy, return, or re rent the equipment.
Would you recommend using equipment lending companies and why?
The Canadian lease market is significant and somewhat fragmented. There are 3 categories of lessors and tens and even hundreds of lessors in each category. The 3 categories are small, mid and large ticket. We meet with many clients who waste a lot of time dealing with the wrong companies based on their credit quality, size and type of asset. Work with an experienced and credible lease professional to eliminate wasted time and dollars, and, even worse, getting into a lease structure and commitment that doesn’t make sense.
What are the basic considerations before getting equipment leasing?
Some basic knowledge and assistance around Canadian equipment finance will allow you to better understand the differences between buying assets and leasing them. The old adage in our industry is that if it depreciates and also makes your firm a profit through use you should, you guess it… LEASE THE ASSET !
Work with someone who can help you understand your rights and obligations and get you into an approved transaction that makes sense.
Tags: asset based lending, asset financing, asset size, business cycle, businesses in canada, company benefit, credit criteria, equipment finance, equipment financing, equipment leasing companies, inflationary pressures, international accounting, lease finance, lessee, maximum benefits, operating leases, payment flexibility, prokop, seasonal industries