Big or small, when purchasing new equipment (such as tools, forklifts, furniture, computers, copiers, etc.), there are basic issues you need to consider. This can from the confusing selection of financing options, to the potential drawbacks.
The first thing to think about is whether to buy the equipment outright, with cash on hand or a line of credit, or lease it from your bank, leasing company, equipment distributor, or manufacturer.
You require much less cash up front when leasing, sometime even 100% financing is available, and is permitted under your loan agreements with your existing bank. Your monthly payment is generally lower when leasing rather than purchasing outright. The reasons are:
The flexibility of leasing is also better as you usually have three options at the end of it:
You need to look at your budget when it comes to new equipment. Looking at your cash flow, what size monthly payment can you afford. Some additional issues to think about:
You have several choices to choose when picking a leasing company: bank, a leasing company, or an equipment manufacturer/distributor (also called “captive” lessor).
Bank financing is usually the most expensive; however, it may be easier as you already have a relationship with them.
The leasing company offers the most flexible terms, and is the best bet if you’ll need a large volume of leased equipment over time. A leasing company has consulting services for asset management, and can help you construct a long term leasing strategy.
The least expensive financing is captive lessors, however, give fewer choices as they’ll only finance the brands they represent.
There are two kinds of leases in Canada: operating lease and capital lease.
In an operating lease, there is no asset controlled by you as you only have the right to use the asset during the lease term. Therefore, the asset is not considered yours, and will not show up as an asset on your balance sheet; only the lease payments will show up as an expense on the income statement.
In a capital lease, you are deemed to have the benefits and liabilities of ownership for the lease term. This is based on the length of the lease, total lease payments required, and the buyout amount at the end. The asset will show up on your balance sheet; however, for tax purposes there is no deprecation. You can deduct the full cost of the lease payments, interest and principal.
Since commercial leases are never written in plain English, like a consumer car lease, you are best to hire a lawyer to review them. Do this even if the leasing company says they’re just standard forms, or not negotiable. Commercial leases are not subject to consumer protection laws.
Certain sections that you should be paying attention to include:
Your lawyer can also determine whether you can lease under your current bank loan financing, and if you need to get the bank’s consent for the lease
Checking into your financing options, and assessing the value of leasing over purchasing will pay off in the end. What’s best for your bottom line is getting that upgrade or adding new equipment so you can grow.
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