Your firm is looking to finance new equipment or potentially to purchase used equipment that still have value and production capabilities for your Canadian company. What is the best financing option, or is it actually better for a firm to pay cash for these types of asset acquisitions?
Certainly outright ownership has its benefits, but at the same time valuable cash resources are drained from your business when you buy an asset for cash, especially an asset that is depreciating in value. For that reason the majority of business owners seek out equipment financing / lease financing solutions for capital asset acquisition.
The obvious benefits of lease financing are touted often – there are other hidden benefits also. One of those aforementioned obvious benefits to equipment financing is simply the ability of your firm to save cash flow and working capital – if cash flow and working capital are ‘ king ‘ as they say, then clearly in the challenging business environment of 2010 they have been re crowned !
You can further augment your cash flow and working capital by giving consideration to a sale leaseback strategy. In this scenario you are maintaining the use of assets you already own and have paid for outright – the strategy completes itself by your firm selling the equipment back to a lease company and paying for it over time again, usually 3 years as an example. Cash proceeds from the sale of the asset you are using go into your company for working capital needs. Many business owners and financial managers in Canada overlook this strategy.
We mentioned some of the lesser known and perhaps less obvious benefits of lease financing. One of those relates strictly to your ability to understand your options at the start of the lease. If you find that you might not want to own, or continue to use the equipment at the end of the lease term you should opt for what is known as an operating lease. This type of lease simply allows you to use the equipment and return it at the end of the lease. But wait, there is more! In a true operating lease you can negotiate with the lessor at the end of the lease to purchase the equipment for its value at that point in time. (Quite often an appraisal is done so the lessor and your firm can agree on the value)
Could there actually be even another benefit to the transaction we have noted above. Yes, because under a true operating lease your overall payments and actual cost of borrowing will be significantly lower – sometimes by 10 – 20 %, versus if you had chosen a lease to own strategy.
Equipment financing can be complex, and the ability to negotiate a proper rate, term, and structure for your firm can be a daunting task. The challenge is further exacerbated when business owners are not knowledgeable enough to relate the pure acquisition to the balance sheet, income statement and other benefits that relate to a properly structured lease. We therefore recommend you seek out the expertise of an experienced , credible and trusted lease financing advisor who can assist you in that regard , often at no charge.