A New Approach To The Asset Finance Challenge For Canadian Business.
Information on lease finance in Canada . Equipment loans and leasing strategies play a key role in business financing in Canada . Knowing how this affects your financials and other lending arrangements is key . Here’s why
When companies borrow from banks and other asset based lending firms there is, almost always, certain covenants that are put in place to ensure the lenders comfort with the financing. These covenants tend to be financial ratios (we can call them ‘number relationships’) that would allow a lender to get some sense of early warning that their loan may not be repaid.
The most typical covenants the lenders place on borrowings tend to be:
– Working capital guidelines
– Total debt versus total equity in the company
– Cash flow coverage
– i.e. the company’s ability to generate cash to pay the loans
When these covenants are broken discussions ensue with the bank and the company!
Leasing and equipment financing, as a borrowing strategy, 99% of the time we feel eliminates the additional risk a company takes when borrowing on equipment. That is to say that lease companies, in general, to not insist on those same restrictive covenants that the bank does. We can therefore make a statement that the company has a greater feeling of independence when it enters into a lease financing arrangement.
Why does the lease company not require those restrictive covenants? That is probably for two reasons – the first is the fact that leasing rates are, in general, higher than bank rates, so the lease company reflects their risk in pricing. Many times the lease firm will also ask for a deposit or advance payment to further augment our above point.
And, at the core of why the lease company does not insist on restrictive covenants, is the fact that most lease firms have very strong asset experience and are generally comfortable with collateral. As we can all imagine, banker can’t be expected to have a strong sense of equipment valuation and remarketing – they are of course more ‘numbers’ oriented – relying on the balance sheet and income statement to predict payment, not the value of the asset.
In summary, leasing as an alternative form of finance allows a firm to acquire equipment without additional concern over lender covenants and ratios more commonly associated with banks.
7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way