It’s no secret that Canadian small businesses need access to the latest equipment to thrive. However, high upfront costs can be a major barrier to entry. Equipment leasing offers a viable and often more advantageous solution, allowing businesses to acquire the equipment they need while preserving valuable cash flow.
How does equipment leasing work?
Leasing is a type of financial agreement that enables a business to access the equipment, machinery, vehicles, or technology they need by paying regular lease payments, usually monthly, without the burden of a loan or purchase. At the end of the lease term, the business may have the option to purchase the equipment at a reduced price, return it, or renew the lease (depending on the type of contract).
Getting started with an equipment lease
Signing an equipment lease is a big step and should not be taken lightly. It’s important to go into the process with a clear view of your business situation and goals. You will need to ask the right questions before approaching a leasing firm, and again before signing a contract. Let’s take a look at what this means for most Canadian small businesses.
Step One: Ask the right questions
Begin by asking important questions about the big picture. Remember, leasing is a great option for small businesses, but you still need to plan ahead to make sure you are prepared for this new responsibility, and to make sure that you fully understand how the process will affect both your bottom line and your operations.
Here are a few important things to consider:
Can the equipment you need be leased?
Many types of equipment can be leased, including second-hand machinery. Depending on the size of your company, you could be eligible to lease:
- Agricultural Equipment
- Construction Equipment
- Excavating Equipment
- Forestry and Logging Equipment
- Transport Equipment
However, there are some types of equipment that are not eligible for leasing according to the Canada Small Business Financing Regulations.
Canadian small businesses cannot lease:
- Equipment with a cost exceeding $250,000.
- Real property or immovables.
- Equipment that is the subject of a conditional sale.
- Equipment that is the subject of a sale-lease back.
It’s important to note that some restrictions apply to capital leases under the Canada Small Business Financing program and other financial leasing entities when leasing certain types of vehicles, such as passenger vehicles and luxury vehicles. While no vehicle type is explicitly prohibited from being leased by Canadian small businesses, the tax deductions and benefits vary significantly based on the vehicle type and its use for business purposes. Businesses should consult with legal professionals to understand the specific regulations that apply to their situation.
What is your budget?
Leasing means committing to monthly payments, and in some cases, to making an initial down payment. While leasing offers tax advantages, you will still be responsible for correctly declaring your lease and paying your taxes.
Depending on the type of equipment and type of lease, you may also be responsible for repairs during the lease term. It is important to evaluate your budget and consider all related and potential expenses before signing a lease.
How long do you intend to use the equipment?
Leasing makes good financial sense over the short term, but can be more expensive than purchasing over the long term. You need to examine your business plan and realistically assess whether leasing or buying is better for your situation.
Consider carefully whether the equipment you need will be necessary for your business operations over many years. How many months of the year will you use the equipment? Snowplows and tractors are generally in use during just one part of the year in Canada. All of these factors will affect whether leasing is the right choice.
How long do you expect the equipment to last?
Some equipment is more likely than others to need repairs. Likewise, some types of equipment lose market value more quickly or are more likely to be replaced by newer technologies than others. Factor this in when deciding whether leasing makes sense.
Does your business have enough credit to qualify for a lease?
Be prepared. You don’t want to waste time (and more money) trying to get a lease without the right qualifications. While some financial institutions offer lease agreements to companies with a low credit score, the terms will likely be less favourable. Assess your business health and be sure that you really do need the equipment you want to lease before moving forward.
Step Two: Choose a financing partner and sign a lease
Once you have decided that leasing is the right option for your business, it’s time to find a financing partner and sign a contract. The more you know in advance, the better you will be able to assess your options.
Choosing a financial institution like a bank might seem easier, but keep in mind this route may be more expensive. It is a good idea to shop around and ask questions. Your financing entity should be willing to talk openly up front about every aspect of the lease terms. The commercial finance brokers at Soluco are always ready to connect with motivated entrepreneurs and will happily answer all of your questions.
Choosing the right type of lease
There are several types of equipment leases. The main differences involve how the lease payments affect your tax payments, whether or not you can buy the equipment once the lease is up, and whether you can trade in equipment for newer machinery.
The two main types of lease are:
- Capital Lease: For tax purposes, lease payments are recorded as liabilities. You cannot purchase the equipment at the end of the lease term.
- Finance (Capital) Lease: The asset remains the property of the lessor during and after the rental period. Businesses have the option to purchase the equipment at the end of the term.
It is a good idea to learn as much as you can about the types of equipment lease agreements before going into negotiations.
Getting the best rate
What is a good rate? How do I get one? Will my rate change over the course of the lease? Specific lease rates will vary according to several factors:
- The terms of the lease
- Lease duration
- Your business credit score
- The specific leasing company
To learn about each of these points in more detail, check out our article on how equipment leasing works.
Examining the terms of the lease
Lease terms for heavy machinery and industrial equipment can vary in several ways. The most common elements are the length of the lease, the payments, the end-of lease options and the associated costs and responsibilities.
The specific details of your individual lease will be outlined in the lease contract, so be prepared to take your time to read the details. Remember that you can always ask your financing firm or consult with a legal professional if there is anything you do not understand.
Leasing and taxes
When a business leases equipment, they can benefit from several tax advantages:
- Deductible Expenses: Lease payments are generally considered an operating expense, reducing your taxable income.
- Principal and Interest Deductions: Both the principal and interest portions of lease payments are typically deductible, regardless of the lease type (operating or capital).
- Sales Tax Benefits: Sales tax can be paid in smaller, more manageable monthly installments. Additionally, these installments may be eligible for the Input Tax Credit each year of the lease term.
Leases offer better tax advantages than loans, and can therefore make a big difference to smaller businesses over both the short and long term, especially if they need to acquire heavy machinery like agricultural equipment or larger vehicles like trailers. Soluco offers 100% tax deductible equipment leases for small businesses.
Advantages of leasing for small businesses
Many Canadian SMBs have gained a competitive edge thanks to the benefits of leasing equipment. In a nutshell, here are the main perks of a lease:
- Avoid large upfront costs: Make manageably monthly payments instead.
- Maintain your credit rating: Lease payments don’t add to your overall debt load.
- Get the most out of your equipment, now: Put your new equipment to work immediately and start generating income.
- Enjoy a low-risk investment: Equipment depreciates annually at rates set by the government. Leasing enables you to bypass the financial risk of a purchase.
- Profit from flexible plans: Enjoy seasonal payment plans, the ability to add extra equipment features for a small increase, and access to the latest technology.
Purchasing equipment may be a sensible choice for some types of business. For many others, the advantages of leasing are undeniable. The choice will always depend on your unique situation. Remember, a thorough analysis of your needs is key to making a decision that will grow your business.
Choose trusted Canadian equipment lease financing for small business
At Soluco, our mission is to provide tailored financing solutions to Canadian small businesses as quickly and efficiently as possible. You can get your lease application approved within 24-48 business hours.Still have questions? We are available to explain which types of equipment are eligible, what you can expect from a lease agreement, and more. Give us a call today.