What is Equipment Leasing?
Equipment leasing in Canada is essentially a long term rental agreement. One party known as the lessor, owns the equipment, and allows someone else, the lessee, to use it in return for monthly payments.
While many people assume that only small, or startup businesses lease equipment, that is not the case. Many large, successful companies choose to lease equipment because it makes the most sense for their financial situation.
All types of equipment can be leased. Leasable equipment includes, but is not limited to: Machinery, tools, construction equipment, computers, manufacturing equipment, medical and dental equipment, office furniture, and even software.
Why Work with an Equipment Leasing Broker?
A mortgage broker consistently works with equipment vendors, and can arrange leasing terms on your behalf. Tapping into their wide network of contacts, a mortgage broker will shop around and find the vendor that has the exact equipment you need, on your behalf. Mortgage brokers can also break up leases across various vendors, to better improve your chances of approval.
Would leasing equipment help your business? Talk to a professional Vancouver Mortgage Broker today!
Types of Equipment Leasing in Vancouver
Just as there are an abundance of different types of businesses, there are many different lease types that are available. Depending on your financial goals, business plans, and equipment requirements, one lease type may be much more suitable for you than others.
Equipment Leasing Type #1: Operating Lease
An operating lease, also known as a fair market value lease, or a true lease are typically short term and have an option to cancel. This type of lease is popular for equipment that does not need to be used long term, or if you’d like the option to purchase it at the end of the term (instead of an extended lease). With this type of agreement, not all of the benefits and risks are transferred to the lessee. Also, an operating lease does not create more debt for the business, as it is written off as an operating expense.
Equipment Leasing Type #2: Capital Lease
A capital lease is considered a long term, noncancelable lease agreement. This type of agreement is typically used for very expensive equipment and machinery that will be used long term. The risks and benefits of the equipment are transferred to the lessee, as they are responsible for handling the insurance and property taxes. A lease is considered a capital lease if it meets any of these qualifications:
- Title is passed to the lessee when term ends
- Term is more than 75% of the leased item’s economic life
- Lessee is given a bargain purchase option
- Present value of the minimum lease payments are more than 90% of the equipment’s fair market value when the lease began
- Payments are more than 90% of the equipment’s fair market value when the lease began
Equipment Leasing Type #3: Stretch Lease
A stretch lease offers the lowest monthly payments and best tax benefits of all the lease types. When the lease ends, the lessee can choose to extend the term, or buy the item. The offer to purchase the item will not be given again if the lessee chooses to extend the lease. This is because the amount of the new lease payments usually equals the amount that would be paid for the item. With a stretch lease, if the amount is approved for payments over 24 months, that time frame can be stretched, to over 27 months for example, making the monthly payment smaller.
Equipment Leasing Type #4: Skip Payment Lease
With a skip payment lease, the lessee is not required to pay for the equipment during the slow periods of their business. A unique payment plan is designed to fit the company’s cash flow cycle. This is an excellent strategy for businesses that do not have consistent cash flow throughout the entire year.
Equipment Leasing Type #5: Master Lease
A master lease is a good option for companies who plan to expand, and scale their business. Under a master lease, the lessee can acquire the goods it currently requires, and then in the future add more items under the same lease agreement.
Equipment Leasing Type #6: Sale and Leaseback
For business who would like to free up capital, a sale and leaseback using equipment they already own is often a good option. The equipment is sold, for cash, to the lessor and then leased back to the lessee. The main benefit is that the business gets to free up capital, and still use the item. Additionally, this agreement can be beneficial to the lessee during tax time, as it will strengthen the balance sheet.
Equipment Leasing Type #7: Lease to Own
A lease to own agreement is for anyone who is positive that they would like to own the equipment once the lease term ends. In this scenario, monthly payments are calculated using the residual value of the item. It is important to note that monthly payments are higher with this option, but only because it will lead to a lower buyout when the lease ends.
Across all leasing types, equipment is categorized into “tickets”. A small ticket item is valued up to $100,000. These are popular with small businesses. Anything valued over $2,000,000 is considered a big ticket item. Any item that falls between those two categories is a medium ticket item.
Benefits of Leasing Companies for Vancouver Businesses
Whether a business is large or small, purchasing brand new equipment every time technology changes can be a huge expense. In addition, sourcing new equipment and disposing of old equipment uses up precious work hours that could be put towards improving the business.
The top benefits of getting equipment through a leasing company in Vancouver are:
Quick Approval Times
Leasing applications can be completed, reviewed, and approved much quicker than getting financing – often within the same day.
Access to the Latest Equipment
By leasing, business owners always have access to top of the line equipment, allowing them to stay competitive even when technology changes – at a fraction of the cost of purchasing equipment outright every time technology changes.
By leasing equipment, business owners no longer have to waste valuable time sourcing new equipment, and dealing with the old equipment when it becomes obsolete.
Maintain your Borrowing Power
By leasing, you can get top of the line equipment you need for your business, but because you haven’t actually borrowed any money, your credit lines stay exactly the same should you need to borrow money in the future.
Finances are Easier to Manage
Fixed lease payments are predictable and very easy to manage. Because equipment lease costs are spread over pre-determined monthly payments, budgeting becomes extremely simple.
Possible Tax Advantages
Depending on the lease type you are using, you could be eligible for tax savings as lease payments are often treated as fully deductible expenses.
A Vancouver Mortgage Broker can assist with everything from large commercial equipment leasing, to small equipment financing in Canada.
Equipment Leasing in Vancouver: How it Works
- 1. Decide which equipment you require.
- 2. Contact your dedicated Vancouver Mortgage Broker to fill out an application.
- 3. We research and negotiate with vendors on your behalf.
- 4. Vendor reviews and approves the lease application.
- 5. The lease gets executed and you get access to the equipment you need.
Leasing vs. Financing – What is the Difference?
Because they both require monthly payments, many people wonder “is leasing the same as financing?” While they do have a lot of similarities (like preserving cash flow), they are not the same. One key difference is that through equipment financing, you completely own the item.
Two common rules of thumb for determining whether you need a lease or a loan (finance) are as follows:
- If your equipment needs to be upgraded a lot to avoid becoming obsolete, you should lease.
- If you are looking for lots of long term tax deductions, you should finance.
Leasing and financing equipment both have possible advantages for a business, however the best choice will depend on a company’s specific financial situation and business goals. Below are some key differences between leasing and financing.
Payments act like rent (operating lease) or payments with interest (capital lease).
Each payment includes a portion of principal and interest, paying down the total amount you owe.
The lessor owns the equipment. You do have the option to purchase it at the end of the term.
You completely own the equipment.
Can be customized to match your cash flow – monthly/seasonal/annual/semi-annual.
None – the equipment is the collateral.
You likely need to have additional collateral (on top of the equipment) to secure the loan.
Leased equipment can be ‘traded-up’ to keep up with new technology.
You own the equipment and risk being stuck with it if it becomes obsolete.
Because you did not borrow any money, your credit remains the same.
Taking out a loan can affect your credit.