Equipment leasing can be a powerful tool for Canadian businesses since it allows them to acquire the tools they need without significant upfront capital.
However, there are also potential risks. From selecting the wrong type of equipment to overlooking crucial contract details, mistakes can lead to unexpected costs, operational inefficiencies, and long-term financial strain.
Take a look at these 6 common equipment leasing mistakes, with examples, so you can find ways to avoid the same pitfalls for your own business.
Mistake 1: Choosing the wrong type of equipment
Leasing equipment that doesn’t quite fit your needs is a surprisingly common pitfall. Businesses sometimes jump into agreements too quickly, which can create an array of problems. They may end up leasing a machine with a lower capacity than they actually need, leading to bottlenecks and inefficiencies. Or they may do the opposite, and lease a piece of equipment with features they’ll never use, essentially paying for capabilities that offer no return on investment.
Example: Landscaping business leasing loaders
A Canadian landscaping business is considering leasing a loader for moving materials like mulch, soil, and gravel. Without a careful assessment, they might opt for a large loader based on the assumption that bigger is always better. But after taking a close look at their typical job sites, they realize that many are residential with narrow pathways and limited maneuverability. A large loader would be awkward and hard to use, potentially damaging property and increasing job completion times. On the other hand, they might consider a smaller, more agile loader to navigate tight spaces. But if they often need to handle large quantities of heavy materials, a smaller loader might require multiple trips, increasing fuel consumption and labor hours, and therefore overall cost.
How to avoid making this type of equipment lease mistake
The best way to avoid this type of mistake is to set aside time to carefully analyze your current and projected workload, identify the specific functionalities required, and research different models to find the best fit. It’s a good idea to do a thorough and well-documented Equipment Needs Assessment.
Mistake 2: Signing the wrong lease for your needs
Equipment lease agreements can seem complex and the process of going through the details can be daunting. Many Canadian businesses stumble by not fully grasping the specifics of the contract they’re signing.
There are several different types of equipment leases and they can differ in important ways, including maintenance, end-of-term options, and tax deductions. It’s worth making the effort to learn about some of these general differences before you enter negotiations, so you are aware of your options.
Once you’ve found the right type of lease, you still need to be sure that the individual elements of the contract align with your operational and financial needs. Remember to diligently read the fine print, where crucial details are often buried.
Example: The roadworks company and the winterization clause
A roadworks company in Quebec leases several pieces of heavy equipment, including asphalt pavers and rollers, on a multi-year contract. They focus on the monthly payments and the equipment specifications, overlooking a clause in the fine print related to winterization and storage. As winter approaches and temperatures plummet in Longueuil, the lease agreement stipulates that the lessee is responsible for specific and costly winterization procedures and secure, climate-controlled storage for all equipment during the off-season. These costs were not factored into their initial budget and significantly impact their profitability during the non-operating months.
How to avoid making this common mistake
Had they carefully read the fine print, the above company might have negotiated a lease that either included winterization and storage in the monthly payments or had more flexible terms regarding off-season equipment management. Knowing how equipment leasing works beforehand will give you a leg up. And always take time to read the contract. Never hesitate to contact your equipment finance firm to ask questions; a reputable firm will be happy to provide clear answers.
Mistake 3: Being unprepared for the credit approval process
Many businesses face unexpected hurdles when leasing equipment simply because they aren’t properly prepared. Leasing companies, like any financial institution, will thoroughly assess your business’s credit profile before approving your lease application.
Your credit score is a key indicator of your company’s financial health and significantly influences the lease terms you’ll be offered. If you aren’t prepared for this step and do not have the necessary financial documentation, you could face delays, unfavorable terms, or even outright rejection.
How to avoid making this type of mistake
You are more likely to get your equipment lease approved quickly if you are thoroughly prepared. Know your business’s credit score beforehand, so you can address any potential issues and gather relevant supporting documentation.
Mistake 4: Neglecting to plan for the short term
Some businesses focus on the long-term benefits of equipment leasing without fully accounting for the short-term impact on their cash flow. Depending on how they are structured, lease payments can strain working capital and potentially make it difficult to manage day-to-day expenses and unexpected costs. This can be especially important during times of economic upheaval.
Example: The small manufacturing firm in Ontario
A small manufacturing firm in Kitchener, Ontario, decides to lease new, state-of-the-art CNC machines to increase their production capacity and improve long-term efficiency. They are excited about the potential for higher output and securing new, larger contracts in the future. However, they opt for a lease agreement with a large upfront security deposit and relatively high monthly payments, believing the future profits will easily cover these costs. Shortly after the lease commences, an unexpected economic slowdown in the automotive sector leads to a decrease in new orders. The high monthly lease payments, coupled with the tied-up security deposit, significantly strain their working capital, making it difficult to cover immediate operational expenses like raw materials and payroll. This short-term cash flow crunch jeopardizes their ability to weather the economic downturn, despite the long-term potential of the leased equipment.
How to avoid making a mistake that could affect your cash flow
To avoid this type of mistake, do what you can to prioritize short-term financial impact and build in flexibility. This could include:
- Conducting thorough cash flow projections that include pessimistic economic scenarios;
- Negotiating for lower upfront costs, such as a smaller security deposit;
- Exploring lease structures with lower initial monthly payments, even if they increase slightly later;
- Considering shorter lease terms or clauses that allow for adjustments or potential exit strategies if economic conditions worsen unexpectedly.
Mistake 5: Neglecting to plan for the long term
Companies may also fail to fully consider future needs. Leasing equipment based solely on your current requirements without anticipating potential growth or changes in operations can lead to a situation where the leased equipment becomes useless before the lease term ends.
Some leases may penalize you for early termination or for exchanging older equipment for a newer model. It’s better to try to forecast potential growth, technological advancements, and shifts in business demands so you can choose equipment that will likely still meet your needs several years down the line.
It’s also important to consider the total cost of the equipment over the lease term. While the initial monthly payments might seem manageable, additional expenses such as insurance, maintenance (if not covered), and potential end-of-lease charges can significantly inflate the overall cost.
Example: The civil engineering firm in Calgary
A civil engineering firm specializing in road construction, leases GPS-guided graders and soil compactors on a four-year contract without anticipating future growth into larger, more technologically demanding projects or the rapid advancements in construction technology. Two years into the lease, securing a major infrastructure project requiring more advanced GPS and the emergence of more fuel-efficient compactors leaves them facing substantial early termination penalties and a lack of cost-effective upgrade options within their existing lease. This oversight in long-term forecasting forces them to choose between using less efficient equipment, potentially impacting project competitiveness and profitability, or incurring significant financial penalties to upgrade to more suitable technology.
How to avoid making this type of equipment lease mistake
Thoroughly assess not just your current needs but also realistic future scenarios before signing a lease. If necessary, prioritize flexible lease terms and future-proof your agreements by negotiating options for upgrades or more lenient early termination clauses based on potential business growth or technological advancements.
Mistake 6: Choosing the wrong lease partner
The process of finding the right lease partner can feel long and tiring, and some businesses give up before they find a firm that offers a lease that aligns with their specific needs. Remember, different leasing companies specialize in various types of equipment and industries. For example, Soluco specializes in financing industrial and commercial equipment for Canadian businesses. You always want a lease agreement that truly serves your business objectives.
Example: A mid-sized manufacturing company in Windsor
Needing specialized robotic welding arms for a new automotive contract, this company chose a leasing partner based solely on the lowest initial monthly payment without properly vetting their industry experience or service capabilities. This partner was primarily focused on office equipment leases, and lacked a deep understanding of the complex maintenance requirements and potential downtime implications critical for industrial robotics. As a result, when technical issues arose with the welding arms, the leasing company’s network of technicians was ill-equipped to handle the repairs promptly. This led to significant production delays, missed deadlines, and ultimately, financial losses for the manufacturer.
How to avoid making this equipment lease mistake
Take the time to find out if your chosen financing firm has the right expertise for your specific project. This includes looking at the types of eligible equipment they frequently finance. Always avoid overpaying or agreeing to conditions that aren’t in your best interest. Choosing the right equipment financing firm will save you both money and trouble.
Soluco provides fast, flexible equipment financing to Canadian businesses
Facing equipment financing needs in Canada? With more than 25 specialized financial partners, you can be confident that Soluco can help you find a solution even if your business is dealing with prior credit issues. Our experienced brokers will help you navigate the approval process whether you are an established business or a recent start-up.We will approve your lease application within 24-48 business hours. Give us a call to speak with a Soluco finance broker directly.