For well established businesses that have great cash flow and excellent credit, the comparison between equipment leasing and other forms of equipment financing are very comparable in terms of rates, but not always that comparable with respect to terms.
With equipment leasing, a business with a strong financial and credit profile can be afforded arguably the highest form of available leverage available to them in the market for equipment financing transctions.
In most cases, strong applicants can get an equipment leasing facility for as little as one or two payments outlined in the lease repayment schedule, paid in advance.
And if there are related costs such as transportation, installation, and training, these costs can be added into the equipment lease as well, effectively providing equipment financing far in excess of 100% of the cost to acquire the asset in the first place.
For those with strong borrowing profiles, equipment leasing is something that should always be considered to conserve on available cash flow.
While the emphasis so far has been on how equipment leasing leverage is so advantageous to “A+” type credit profiles, the financing leverage is still going to be strong for businesses with less than perfect credit and cash flow as well.
With many small businesses where the financing requirements are under $250,000, equipment leasing still provides high levels of leverage to different credit and financial profiles, but at slightly higher rates.
For most small and medium sized businesses, equipment leasing is a tradeoff between rate on one side and leverage and speed on the other side.
The lowest cost forms of financing not only move slowly, but they also tend to be conservative when it comes to leverage where even the better credit risk applications are still required to have an investment in an equipment purchase of at least 25%.
The competitive strength of the equipment leasing model is “ready to go” financing at high levels of leverage in comparison to the bank alternatives.
And even though at times equipment leasing rates can be slightly higher than the effective rate on a comparable loan, the cost of capital does not do you any good if the additional time it takes to secure it causes you to either lose out on business opportunities or delay the ability to make sales.
If the time value of money is properly factored in from the outset, equipment leasing can still be considered lower cost even at slightly higher posted rates, provide that the leverage is strong and the transaction turnaround time is fast.
Toronto equipment leasing options are readily available for businesses in Toronto, the Greater Toronto Area, and Southern Ontario.
This region is blessed with a large number of both national and regional equipment leasing companies, most of whom have a preference to provide equipment lease financing in Ontario due to the close proximity to their headquarters.
Having several potential options can have both its pluses and minuses.
For instance, sometimes it can be hard to find the lowest cost form of Toronto equipment leasing, resulting in business owners paying higher effective rates that other potential options.
On the minus side, many of the Ontario equipment leasing companies that service the Toronto and surrounding area only work through equipment leasing brokers.
This is in itself is only an issue or problem if you are trying to arrange equipment leasing on you’re on.
Working with an experienced equipment leasing broker or specialist can help you quickly zero in on your best overall options, regardless if they are broker specific or not.
Many leasing companies will have a certain focus in the market, such as certain industry and asset types, credit profiles, and so on.
Knowing which Toronto equipment leasing companies are going to be best suited to your equipment leasing request and business financing profile is the key to getting the rates and terms you’re looking for.
For equipment lease financing requests under $25,000, approvals can be granted in a matter of hours. For amounts under $100,000 you can still get financing approved in 24 hours. As the amount of equipment lease financing increases, the longer the process will take as higher lease values will have to be reviewed by more than one person at the leasing company. For most applications, regardless of size, the equipment lease financing decision will be made in three to five business days assuming all lender requested information to support the application is readily available.
Once approved, most deals can be funded in a matter of days, so the entire process from time of application to funding is typically no more than a week or five business says.
The standard information we need to start with to assess your request for financing is a completed application form and a copy of an invoice/quote/estimate from the vendor who is prepared to sell you the equipment you are trying to secure.
As equipment leasing specialists, we will then review the information provided and recommend other information items that the lender is likely going to require in order to speed up the application process.
Typically when a business owner or manager calls in, we will go through their situation for Toronto equipment leasing with them on the phone and suggest the best lease financing options available through our equipment leasing company network.
Used equipment leasing has become very common in the industry with most leasing companies participating in it to some degree.
The key with leasing used equipment is the remaining useful life of the asset to be financed relative to the lease term that is being considered.
For more heavy duty equipment that is not technology based in the sense that it will not be obsolete in the near future, there are typically multiple equipment lease financing options available.
Anything where obsolesce is a potential issue is going to attract shorter lease terms.
Part of the challenge with used equipment leasing is the nature of the transaction itself.
For instance, is the seller a dealer that is licensed to sell equipment or a private seller such as a business or even an individual?
When the purchase is from a dealer, the leasing company will typically do a quick check of the dealer to make sure they are reputable in terms of both sales transactions and after sales service.
For private sales, a qualified piece of equipment will have to go through a search and waver process to make sure that there are no outstanding liens registered against the equipment and if there are, the lien holder will have to be notified and asked to sign a waiver indicating that there is nothing owing on the asset.
Like any type of financing arrangement, a good portion of the lending or leasing decision by a leasing company is going to depend on the credit worthiness of the applicant in terms of their credit history and financial profile.
Even though a piece of equipment is used, its still possible to secure solid rates and the longer the estimated useful life, the longer the lease term can potentially be.
Its very common for leasing companies to provide some combination of internal market analysis on the asset and third party appraiser assessment to make sure that the value being paid and the remaining useful life of the asset are both well understood.
With most used equipment leasing scenarios, the borrower or lessee can expect to get financing in the 75% to 85% range of the purchase price of the asset. There can be exceptions both ways depending on the applicants financial and credit profile as well as the equipment type and condition, but for the most part this is a typical range that you’re likely to see.
Therefore, you can expect the amount of leverage on used equipment to be slightly lower than for new equipment most of time and that a larger cash down payment will be required in order to complete the equipment financing on a used equipment purchase.
The other thing to keep in mind is that equipment age will also play into financing that is available as well as rates and terms. Even if an asset is in great condition it still may be hard to find the financing you’re looking for if it has considerable age.
The age factor will vary considerably by asset type but in general anything that is under 5 years old and is in good condition with significant remaining useful life has a good chance of being financed.
Lease companies have very streamlined appication processes that are designed to require very basic information for smaller ticket deals, with information requirements increasing with lease request complexity. As an example, for amounts requested under $25,000, the application can be completed in just a few minutes and an approval received in as little as an hour via electronic scoring systems specifically designed for speed. With higher value requests, more information will be required with approvals being issued in one to 3 business days in most cases. Compared to an equipment loan process that tends to require the same amount of information and time process an application, the leasing process is noticeably faster.
One of the reasons for the faster process is due to the demand by customer to have a faster process in order to take advantage of opportunities to purchase equipment when items come available and to reduce business down time when replacements are required. Another reason lies in the fact that the leasing company ends up owning the underlying security and they will also only focus on equipment they feel comfortable liquidating, allowing for a quicker assessment of any financing request.
Cash tends to be a precious commodity in any business, and the ability to create a higher level of financial leverage at reasonable costs is important to manage cash flow and acquire the necessary assets to run the business. For equipment leasing, leverage or the percentage of the asset value that can be financed, is as high as 100% in most cases. In cases where delivery, installation, and training costs are involved with the asset purchase, these related soft costs can be financed by the lease as well, effectively providing greater than 100% financing.
And by being able to access lease financing, a business can keep their line of credit and cash supply available for working capital and other requirements.
An approved equipment lease will be repaid through an amortized payment schedule that remains fixed during the entire lease period. The lease term can also be matched to the timing of the real depreciation of the equipment so that you’re only paying for the value being consumed versus paying for equity in the equipment that can’t be expensed until much later into the future. As a result, the lessee can more accurately manage cash flow and project future cash flow requirements including when asset replacements or upgrades will need to be made.
When you purchase an asset for cash, you are required to pay all the point of sale taxes at that time. With equipment leasing, the lease company is the one purchasing the asset, so they pay the taxes at the point of sale and the lessee only pays taxes on each lease payment as they come due. This creates a deferment of taxes which reduces the amount of cash outlay that is required at time of purchase.
Operating leases and capital leases have different accounting both for the business financial statement and income tax planning. Based on the nature of the business, there can be advantages to considering different types of leasing programs to get the most tax and accounting benefits. For instance, a capital lease is treated more like an equipment loan for accounting and taxation purposes, while an operating lease can allow for 100% of the lease payment to be classified as an operating expense.
There are basically two types of equipment leases: Operating leases and capital leases. Statistically, the majority of leases are capital leases and you can’t even get an operating lease for certain types of equipment.
From a taxation point of view, you basically write off your operating lease payments as an operating expense and do not show the related liability to the leasing company on the balance sheet (although it may need to be disclosed in the notes to the financial statements). With a capital lease, you have to show the liability on the balance sheet of the business and the lease payment is treated more like a loan payment whereby the implicit interest rate is deducted as an operating expensive and the value of the equipment is depreciated over time both for depreciation and capital cost allowance.
So while there are those that tout one form of lease over the other for tax purposes, its arguable if one really has a financial and taxation benefit over the other for any given scenario due to the variability in terms and deal structure from on situation to another.
The real distinction between the two is that with a capital lease, you are obligated to purchase the asset at the end of the lease term from the lessor for a stated price, typically nominal in value. With an operating lease, you do not have the same obligation to purchase and in fact are required to return the asset to the control of the lessor.
Here in lies the real value of the operating lease.
As a business owner, if you are utilizing equipment that will depreciate quickly from high utilization and/or quickly become obsolete from advances in technology, then an operating lease is something to consider.
For instance, in the trucking industry, where vehicles rapidly depreciate and will become more maintenance intensive as they get older, operating leases can be quite common. In the computer industry, where hardware goes out of date rapidly and needs to constantly be upgraded, equipment operating leases can also be available.
Keep in mind that there is an incremental cost borne into the operating lease for the vendor to be able to dispose of the asset without incurring a loss. If this wasn’t the case, the vendor wouldn’t offer this type of financing. And in industries where there is a large resale market like trucking, lessors can have a very solid system for asset liquidation that makes operating leases profitable for them to offer.
The key here is the mathematics.
If you can pencil out that the higher implicit cost of an operating lease will be offset by the long term repair and maintenance bills you will avoid, then an operating lease is something to consider.
If you do the math, and the numbers can’t add up, then you should be considering a capital lease. Too often a decision towards an operating lease is borne out of the luxury of not having to deal with older equipment and the thrill of getting new replacement equipment on a semi-regular basis versus any actual cost savings that may or may not occur.
If you’d like to go through the numbers, your best bet is to contact an equipment financing specialist and work through your scenario together before making a financing decision for an operating lease versus a capital lease or equipment loan.