Equipment Financing in Canada and Debt capacity

Does Leasing have a ' hidden cost '?

Every company that chooses to acquire new equipment or technology is always faced with the basic question - ' Do we purchase the equipment , or should we finance the equipment ?'<br><br>Although leasing and equipment should be viewed in a very positive context of additional alternative financing it is important for the business owner or financial executive to understand any hidden costs or intangible effects around the proposed transaction .<br><br>Business owners must understand that a lease contract is clearly a debt or liability . It is of course, secured borrowing, so the business owner must reflect on the fact that an equipment or lease financing is a liability, and , as such , has a consequence if unpaid .<br><br>Naturally 99% of all firms, we hope!, go into such transactions with the full intention of paying, so lets put that point aside . The other point we have to reflect on then is that a firm can only carry so much debt. Every firm or industry has what the finance text books call 'debt/equity ratios', or 'debt/equity capacity'.<br><br>Leasing essentially replace debt, or is another form of debt . More sophisticated borrowers will say they utilize such strategies as operating leases, which in effect remove the debt from the balance sheet . However sophisticated financial analysts will of course go into the detailed notes in a firms financial statements and reflect on the fact that a lot of the debt , while not on the balance sheet, still exists and needs to be serviced . <br><br>We do not want our information shared here to become to complex for readers, or to become an accounting exercise . However , one needs to understand the numbers .<br><br>If the company buys the machine our of cash and equity there is no significant changes to the firms overall debt structure . If the firm finances the machine its debt will increase .<br><br>Leasing and financing do of course provide 100% financing ( sometimes a down payment might be required ) , but the overall lease and finance strategy significantly affect the overall debt structure of the firm .<br><br>Borrowers should also understand that in many cases after a lease is paid off the firm does not necessarily own the asset or the residual value attached to the asset . However , at the same time if the financing was structured as a bank loan it might have very restrictive covenants, most of which don't exist in leasing arrangements . Leasing payments can also usually be matched more specifically to equipment use, estimated useful life, and more specific cash flow seasonality in the company . <br><br>In summary , equipment leasing and financing is overall a solid strategy employed by hundreds of thousands of firms all over Canada and the U.S. Business owners simply need to be savvy as to how this solid financing strategy affects their firms re financial and non financial factors .

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