Is it wrong for Canadian business owners and financial managers to want the lowest interest rate and best overall leasing costs and rates in asset finance in Canada? We’ve never been convinced that a ‘ low rate’ per se is absolutely the only way you should be looking at an asset finance acquisition, but it is certainly one major factor in your overall decision.
Let’s examine what factors are critical in assessing a ‘ best rate ‘ on a deal and how your lessor actually calculates finance rates in leases and equipment loans. Times change in business, Canadian business owners and financial managers are currently right where they need to be when it comes to asset finance. The industry (equipment lease financing) is currently on a roll. And what does that mean to you, the business owner or finance manager. Simply that the best competitive rates, terms and structures are available.
There are a solid handful of key issues that reflect what determines your final lease pricing. One of these is simply the asset you are financing – assets that depreciate less quickly than others can often command a lower lease rate. Extreme example of this might be computers and aircraft. Computers, from a hardware perspective, depreciate quickly, if only for the good reason that technology changes quickly and hardware offerings get better than ever. On the other hand aircraft terms can be anywhere from 5- 20 years (try obtaining lease financing on a 20 year amortization on your next laptop acquisition!), simply because the asset still has significant value over a long period of time.
Credit quality also of course plays a key role in determining leasing costs in asset finance. Lessors determine your final pricing with significant emphasis on credit criteria. Companies that receive the best pricing and lease interest rates typically they have cash flows that historically, current, and in the future have the ability to make lease payments.
In reality it’s a simple mechanical calculation – take your company’s annual current cash flow (income plus deprecation is the quick calc on this one) and factor in the amount of debt that a years lease payments might add on to that. If your cash flow is still positive then you have met a key requirement of obtaining financing leasing costs that many other firms might not be able to achieve.
Naturally the type of lease you enter into (capital or operating are the two main ones) also affects lease pricing. Either you or the lessor might have a secret plan to sell or remarket the equipment at the end of the term of the lease. That affects your pricing naturally!
The last thing we consider ourselves is tax experts, but issues such as taxes and timing of cash flows have a significant impact on lease interest rates.
Oh, and by the way, your lease company borrowed money in order to lend you money. They all have different costs of funds depending on who owns them, the amount of equity they have in their firm, and the types of losses they experience in their own portfolios.
So who can you turn to in trying to understand credit criteria and which firms are the best to work with in Canada? Working with a trusted Canadian business financing advisor can help you sort through a myriad of issues that affect lease costs and asset financing.