In equipment financing in Canada does the term ‘ operating lease vs. capital lease’ mean something to you when it comes to financing assets? It should… so let’s dig in.
That term specifically revolves around the type lease that you choose when you’re acquiring fixed assets – i.e. computers, machinery, shop floor equipment, rolling stock, etc. Even your corporate jet applies here! Well, we can wish, can’t we?
Knowing the differences in these two terms makes or breaks the ultimate finance strategy you choose when acquiring assets. And you thought it was all about the interest rate!
The type of lease you choose affects the ultimate profitability of your lease company, and that should be important as that profit is generated from dealing with your company.
Operating leases are all about ‘ using assets’… not owning them. So a significant part of the ‘OPERATING LEASE’ is the value of the equipment at the end of the lease – as in how it is recorded and how it is realized.
Clients are sometimes surprised at the low monthly payments in an operating lease – they shouldn’t be, as its all part of a waiting game that kicks into place at the end of the lease term. That’s when your lease document should provide you with 3 critical options on the asset – renew, return, purchase.
There is in fact a 4th option on occasion and that is ‘ upgrade’ as many assets lend themselves to being upgraded to keep technology and use up to date. So that low payment we have just mentioned is simply because the lessors profit is going to come at the end of the lease.
Operating leases are perfect legal and widely in use. They have though lost some of their luster due to international accounting standards which has affect how they are recorded on your balance sheet. In past years they were a great way of hiding debt on the balance sheet unless the reader took the time to peruse footnotes in financials – which most people don’t/didn’t!
The capital lease on the other hand is all about owning assets… So profit generated by the lease company comes solely from the interest /finance rate on your transaction. So your capital ‘ lease to own’ is all about fixed monthly payments.
However, capital leases can be structured in many ways to seem like a lower monthly payment – one of those strategies employed by both you and or your lease firm partner is creating a transaction that has a bargain purchase option – it’s in effect a balloon payment due at the end of the lease. Therefore monthly payments are low and the ‘ balloon payment’ at the end of the lease term can be refinanced.
Many clients we meet are overwhelmed by some of the confusion in terms around equipment financing. The reality though is that there are only 5 parts of any lease – the term, the rate, the payment , the end of term , and of course the $ value of your transaction. If you know 4 of those you can do a really good job at exactly or closely guessing the other components.
Don’t get caught in the ‘ lease terminology’ game. If you’re financing assets seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of success in financing the assets you need to keep your firm profitable, successful, and growing.
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 10 years – has completed in excess of 80 Million $$ of financing for Canadian corporations .
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