Which Lease Finance Method Is Best For Your Company?
Information on the operating lease in Canada, aka FMV leasing. Here Are The Differences Compared With Finance Leases .
An ' operating lease '. Canadian business owners and financial managers have access to what is known also as ' FMV LEASING ‘... they just sometimes don't know what that is and when to use it . Let's cover off what you need to know.
When you enter into an operating lease there is generally intent by your company to return the asset to the lease company, as opposed to finance leases where you have a very clear intent to keep and own the asset at the end of the lease.
Oh, by the way though, just because you enter into FMV leasing (FMV = Fair Market Value ' it does not necessarily mean you absolutely have to return the asset. That is one of the beauties of operating leases; you have several different choices at the end of the lease term. We can see why the operating lease is called a ' true lease ' ... you're leasing... not owning... as simple as that.
One of the main challenges in what you need to know about an FMV lease is simply that the true monetary value of the asset in your transaction is not known at the beginning of the lease term. Take computer assets for example... with all their changing technology who could possibly predict with absolute certainty what a computer in today’s world will be worth 3 or 4 years from now?! Not us... that’s for sure and we toiled in that industry for 20 years!
In operating leases the actual accounting of the lease plays a huge role in your overall transaction. That’s because how the transaction is treated has a significant impact on your balance sheet and income statement. Also, accounting rules do not allow the lease company to specify the value of the asset at end of lease term. That often tends to be both good and bad for your company, the lessee as we will explain.
Many lease companies in Canada, and lessees try and arrange a side agreement between themselves. That certainly can be done, but it is somewhat dangerous as it is often viewed as circumventing the lease accounting rules around the operating lease. In a worse case scenario your auditors, or CRA - Revenue Canada might in fact impose penalties around interest, taxes, etc, as these are in fact impacted by the real structure of an operating lease.
The ultimate challenge of the operating lease is the value of the asset at end of lease term. You have to be able to be in a position to understand what the asset is worth from a monetization perspective. The good news is that with the internet and other sources business owners these days have a huge amount of information available to them with respect to the true value of any asset.
The lease company is of course entitled to a ' reasonable profit '. We would never fault them for that. But you as the business owner/manager and lessee have the total ability to ensure that profit is... reasonable. That’s because FMV leasing gives you the option of purchasing, returning, and even upgrading the asset when you are dealing with the right lease company.
If you're focused on understanding both finance leases and Operating Lease options for assets financed in Canada speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in achieving your financial goals in asset acquisition.
Stan Prokop - founder of 7 Park Avenue Financial –
http://www.7parkavenuefinancial.com
Originating business financing for Canadian companies , specializing in working capital, cash flow, asset based financing . In business 7 years - has completed in excess of 80 Million $$ of financing for Canadian corporations . Core competancies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details :
http://www.7parkavenuefinancial.com/operating_lease_fmv_leasing_finance_leases.html
