Making the decision to utilize equpment leasing companies for asset financing might involve a decision you may not have properly considered… and it’s an important one… Which type of lease best suits your needs on this particular transaction?
Canadian business owners and financial managers essentially have 3 choices when it comes to matching up their asset finance acquisition to the right type of structure, and that includes the accounting and tax treatment also. Let’s examine those 3 choices and ensure you are properly positioning the financing of that asset.
The ‘ Go To’ transaction that most business owners consider when they start to work with equipment leasing companies in Canada is the ‘ finance lease ‘… aka the ‘ capital lease ‘ …and a final aka .. The ‘ lease to own’. Choosing this first of our three choices has you focusing on one thing, owning the asset at the end of the lease term.
The key factors that you need to consider under this type of transaction are the interest rate, what you will do with the asset at the end of the lease term, and any accounting and tax considerations that might come into play based on the asset you are financing as well as the size of the transaction.
We always caution clients that if it is their true intention to own and keep that asset that they double ensure that equipment leasing companies don’t structure the asset as being the properly of the lessor at the end of the lease . Naturally they don’t want to own and use the asset, but they do want to try to re lease it to you or sell it to you… after you have paid for it in full once already!
Interest rates are a key part of the transaction in any equipment lease deal. There are 5 elements in any lease pricing transaction – term, rate, and payment, value of the deal, and future value at end of term. If you know 4 of those any simple financing calculator will allow you to calculate the missing piece of the puzzle.
2nd type of lease. It’s an operating or fair market value asset finance transaction. While it’s a favorite of our clients it’s important to ensure you level the playing field with equpment leasing companies in Canada that offer this type of transaction. The operating lease is all about one thing, flexibility.
So, properly structured you have just entered into lease finance nirvana when you consider a fair market value lease transaction. Why? Simply because at the end of the lease term you have the option to purchase, return, or upgrade and extend the transaction. Operating leases are perfectly suited to technology and heavy equpment type transactions, due in part to the size and use of the asset.
Our third and final type of lease is not necessarily a lease type per se… it’s the sale leaseback .Typically structured as a capital lease, but not necessarily, you are selling he asst back to the leasing company. Your key benefit – cash flow and working capital on an asset that otherwise was only sitting there! Almost all types of real properly assets can be financed back under a sale leaseback type scenario. On alternative to the sale leaseback that is shorter in nature is to consider a bridge loan as opposed to entering into a finance transaction with equipment leasing companies.
The bottom line? As always, its stay informed and gets the right advice on which type of asset finance transaction structure works best for your firm. Speak to a trusted, credible and experienced Canadian business financing advisor on which structure maximizes the benefits for your company.