Equipment Leasing Specialists

What’s The Difference Between An Equipment Leasing Specialist And an Equipment Leasing Broker?

By definition, an equipment leasing specialist is also an equipment leasing broker in that part of the role is to facilitate the transaction between the lessor and the lessee.  But that’s about where the comparison ends.

In the equipment world, virtually anyone can be a broker.  There are no formal qualifications, at least not in Canada, to become an equipment broker, so there are lots of individuals describing themselves as brokers who don’t know a great deal about the business.

A leasing specialist is a broker that has considerable knowledge and experience in the field of equipment financing and is more focused on doing what’s best for the customer than a non specialist.

With new or low knowledge brokers, the primary objective is to get a signed application for lease financing, send it off to as many leasing companies as possible, and hope that one of the companies funds the deal so the broker can get paid.

With an equipment leasing specialist, the first priority is to accurately assess your situation and needs and then focus your application efforts towards relevant lessors only.   This is in tuned with hunting with a rifle instead of a shot gun and can not only greatly increase your chances of getting your request funded, but also get the best terms and conditions available to you.

Here’s how.

The shot gun approach can cause a number of problems.  First, unless the broker involved provides your credit report to all the lease companies that receive your application, there is a good chance that each company could pull one or more credit reports for you and your business.  Not only do the extra inquiries negatively impact your credit rating, but it also can create unnecessary application declines when lessors see all the inquiries by other financing companies, indicating that the deal has been broadly shopped and may even have problems other lessors weren’t interested in.

Another problem with this approach is that the broker may generate an approval, but it could be for an inferior offer compared to what you should be able to secure in the market.  But because the customer relies on the broker’s advise, they may not know this and actually end up with more expensive financing.

Brokers also retain their access with certain lessors by hitting volume targets, so they may not be motivated to get you the best deal if it means getting an approval from a finance source that adds your deal to their quota.

Equipment leasing specialists are customer focused and understand that doing right by the client will benefit them through referrals and repeat business.

Lease specialists are also well versed in helping you put together a solid application that proactively answers all the expected questions of the lessor.  Managing the application process is an acquired skill and can make or break the deal.    And once an approval is secured, there still can be considerable work meeting the terms and conditions which typically will be handled seamlessly by equipment leasing specialists.

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Commercial Equipment Leasing

Commercial Equipment Leasing products can cover many different types of asset types that are utilized by going concern businesses.

A commercial equipment lease, or business equipment lease can finance asset purchases of as low as $1,000 in some cases to several million dollars in cost.

The key difference between consumer equipment leasing and leases for commercial equipment is the variety of assets that are considered for financing.

Every industry has its own equipment usage needs and the related cost need to be financed by some combination of cash, loans, or leases.  For commercial leasing to be available for an asset type, the asset needs to have both significant sales in the market on an annual and ongoing basis as well as a resale and/or disposal market for used equipment.

If these conditions exist, then its very likely that a commercial leasing source will be available to business owners that wish to acquire the product.

Commercial equipment lease programs tend to be very focused on a particular slice of the market.  Some companies will only consider equipment financing applications of less than $150,000 while still others will concentrate on larger sized equipment financing requirements.

Some leasing companies can be very focused on certain types of equipment while other companies can be very broad based in terms of what they will consider financing.

One thing that is for certain is the more volume and variety of an equipment type sold into the market, the more commercial equipment financing options will be available.

Commercial equipment leasing can also range in cost from bank prime plus effective lending rates to lending rates climbing into the high teens.  Higher rates relate to higher risk and lenders that are prepared to provide equipment leases that are higher risk in nature typically will have a strong liquidation pathway for the equipment.  What this effectively means is that the leasing company has very in depth knowledge of the equipment resale market and understands exactly how to dispose of the equipment that is financed and what is the likely sale value they can receive under a forced liquidation scenario.

The higher risk lenders tend to be vertically integrated with equipment resellers and auction services that provide the means for disposing of equipment in the event that a lessee defaults on the lease and a collection action needs to be undertaken.

While low risk commercial equipment leasing companies have the same concerns when it comes to managing risk, their focus is more on the financial strength of the overall business and the business owners.

Equipment leases under $25,000 are approved in a similar fashion to consumer financing whereby the decision to approve a lease application is largely based on credit history and stated income.  As the the amount of lease financing requested increases, the more information will be required to support an approval.  Once applications get into the hundreds of thousands of dollars, multiple years of accountant prepared financial statements will be required along with accounts payable and accounts receivable ledgers, customer contracts, supplier contracts, business plans, cash flow projections, and anything else that would support the case for financing.

And like consumer lease financing, business equipment leasing can cover off 100% of the asset cost, making it a highly leveraged and cash flow friendly form of financing.

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Operating Lease Versus Capital Lease

Depending on the country you live in and the related tax jurisdiction, the definition of operating and capital leases can vary for accounting and income tax purposes.

In Canada, an overview of the related definitions are as follows (check with your accountant for a more detailed review of the rules and related interpretations).

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For a capital lease, the equipment is expected to be financed for most of its useful life and there is a reasonable expectation in place that the lessee will purchase the equipment outright from the lessor at the end of the lease term.

An operating lease is basically the opposite in that the equipment is leased for less of the useful life of the asset and at the end of the lease term, the lessee can return the asset to the lessor with no further obligation.

From an accounting point of view, the assessment of capital versus operating lease is done by applying the following four rules to a leasing transaction.  If any of these four rules apply, the underlying lease is a capital lease.

First, does the lease term represent more than 75% of the equipments projected useful life?

Second, does the lease provide the lessee with an option to purchase the equipment at an amount less than its fair market value?

Third, will the ownership of the equipment be transferred to the lessee at the expiration of the lease term?

Fourth, is the net present value of all the lease payments greater than 90% of the fair market value of the equipment?

If the answer to all of the four questions is NO, then the lease is an operating lease.

A capital lease ends up being accounted for on your financial statements much like an asset purchase in that the leased item has to be set up as an asset and depreciated over time while the lease needs to be shown as a liability with the interest portion recorded as an expense for tax purposes.

Operating leases are not listed on the balance sheet (they may be listed in the notes) and the related payments are recorded as an operating expense.

Unless the business has no intended future use for an asset after the financing period, the resulting financing tends to be in the form of a capital lease.

Capital leases also tend to be lower in what we’ll call the net effective costs associated with the lease as there is no risk premium built in by the lessor for asset disposition at the end of the lease term.

Operating leases are more suited to assets that either wear out quickly from heavy use or are rapidly replaced in the market by newer technology.

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Small Business Equipment Leasing

Small business equipment leasing options are available for just about any type of equipment with a value of at least $1,500.

Equipment leasing programs tend to be categorized according to time in business (start up, less than 2 years, greater than 2 years), amount of financing (up to $100,000 is small ticket, and over that is large ticket), and credit profile of the borrower.

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For start up financing requests, there typically will be lending limits of anywhere from $25,000 to $50,000.  Start up financing applications are largely assessed on personal factors of the borrower due to the lack of business history.

Even when companies are under two years in business, the credit assessment is still largely personal in nature for the smaller financing amounts.  The only real difference compared with a start up application is that lease companies will tend to consider large amounts.

Once a company is more than two years in business, has two years of financial statements under its belt, and has had the chance to establish some business credit, an equipment financing application is more highly weighted toward business related factors.

Small business equipment leasing can be very specific in nature to the type of equipment as well as geography and credit history.

There are leasing companies that are also very broad based in terms of the types of assets they will cover, although they will also tend to have an asset rating system that will indicate the types of assets they prefer to finance versus ones that are considered to be more risky.  The more risk associated with an asset type, the harder it typically will be to secure financing, and when financing is secured, the terms and conditions will likely be tighter.  For instance, a sizable down payment could be required, or an additional guarantor, or higher interest rates and shorter lease terms may become part of the lease commitment offer.

Small business equipment leasing typically requires a personal guarantee from one or more individuals whereby the guarantor is expected to have solid credit and a net worth and/or annual cash flow capable of covering off the lease obligations in the event that the small business holding the lease does not make all its payments or honor all the terms and conditions of the lease.

Lease financing companies can also be very niche focused, only focusing on asset types that they know how to liquidate in the event of default.  Sometimes these companies are vertically integrated with equipment liquidators so that they can more accurately assess the recovery value of an asset and to also allow them to participate in financing used equipment in their niche.  One of the main requirements  for this type of lender is the presence of a large and active resale market for the assets they focus on.

For small business equipment financing applications under $25,000, lease approvals can be received in a matter of hours with very limited application information required.  As the amount of financing required goes up, so does the amount of information requested in the application and the time required to process and render an approval or decline (1 ot 3 days).

The large majority of equipment financing approvals do not require any down payments and can provide lease terms of 5 years or greater in some instances.

To understand how to take advantage of small business equipment leasing, contact an equipment leasing and financing specialist and get all your questions answered before signing up for any lease financing program.

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Ontario Equipment Leasing Options

One of the benefits of having a business in Ontario is the large number of leasing options available to you.

While the typical equipment leasing spectrum tends to cover off virtually any type of asset and almost any level of credit,  in Canada, this full range of equipment lease choices is really limited to Ontario.

The size and diversity of the Ontario economy can support a large number of equipment financing companies due to the ability of each lender or lessor to become more specialized on certain asset groups, industry types, credit rates, and even regions within the provincial geography.

To this last point, businesses located in the outlying areas of northern or northwestern Ontario will not be afforded the same financing opportunities as those in the Greater Toronto Area (GTA), but in most cases, they will still have more options than many other parts of the country.

Ontario has a significant number of boutique equipment lenders that are relatively small in size in terms of dollars in their lending portfolios.  But collectively, they provide tremendous coverage of all the different possible borrower profiles and equipment types.

And for many asset types, the competition can be significant, providing more choices and options for business owners and managers.

While the size and diversity of the provincial economy drives the overall equipment financing market, there are a few key aspects of a large economy that make it more appealing to lease companies.

First, industry diversity allows a finance company to specialize on the specific asset types in a given sector.  This is important to better understand how to value used equipment offered as security and how to liquidate assets to cover off outstanding balances should the need arise.

Larger industries will have active resale markets.  For leasing companies, this provides a market for not only disposing of assets on a timely basis, but also creating a secondary market for financing used equipment.

Second, large diverse economies are less impacted, on average, by economic shocks.  While the current recessionary impacts are definitely felt in Ontario and across Canada, the Ontario market impacts are always going to be smaller for a number of reasons.  1st, recessionary forces shut down lenders as the money supply becomes constricted.  If you’re located outside of Ontario and you lose a key lender that’s available to you, the impacts on your business can be significant if there’s no close alternative.  2nd, a diverse economy will absorb financial shocks better than one focused only on one or two industries.

Third, larger economies tend to offer more sources of capital to lenders.  When economic pressures build up, one of the biggest challenges an equipment finance company can have is maintaining sources of capital for their leasing activities.  If you’re  a leasing company and only have one source of capital that gets impacted by recessionary forces, you can quickly be out of business.  While this will also happen to Ontario based equipment leasing sources, it will likely happen less often, and when it does happen, there will be alternative equipment leasing companies ready to step in to gain market share.

The bottom line is that business owner in Ontario may have several equipment financing sources to choose from at any given time.

The key is focusing on relevant lenders that are the most suitable for the equipment you want to finance and the overall financing profile of your business.  The best way to get the best results and avoid many of the more typical mistakes, is to work with an equipment financing specialist.

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