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Equipment Lease Rates and Interest Finance Charges in Canadian Lease Finance….

What You Need to Know About Equipment Lease Rates and Interest Finance Charges in Canadian Lease Finance….

Although the Canadian equipment finance industry is very competitive many Canadian business owners and financial mangers don’t fully understand how equipment lease rates and interest finance charges are calculated… how they can be managed, and what issues affect your ultimate monthly pricing. Let’s examine some ‘ need to know ‘points that will allow you to fully maximize the benefits of lease financing assets in Canada.

We don’t blame clients for always wanting ‘ the best deal ‘… the ‘ lowest rate ‘… the ‘ smallest monthly payment ‘. Some of the variables that go into those issues are controlled by the lessor; some can easily be managed by you.

Asset quality is often a factor in Canadian lease finance. The ability of either yourself of the lessor to understand the ongoing value and the final residual value of the asset you are financing plays a key role in equipment finance pricing in the Canadian marketplace. A win win situation exists of course when both you and the lessor have a transaction that meets both of your needs.

Lessors refer to their profit on a transaction as their ‘ yield ‘. Many lease finance firms strive to earn a certain constant yield on their lease transaction they finance for Canadian business. It’s simply their ultimate profit for putting funds out on your transaction.

Canadian business mangers choose from only two basic lease types when acquiring and asset via a lease finance strategy. Its as simple as that, you are either selecting a capital lease, which is a ‘ lease to own ‘ strategy, or alternatively you are choosing and operating lease .The operating lease is a transaction wherein you have a stated intention to return or upgrade the asset during or at the end of the lease term . The true beauty of the operating lease is that it also gives you still the right to purchase the asset, even though that might not have been your original intention.

Put yourself in the eyes of the lease company, and let’s use a simple example of a 1000.00 transaction. If the final residual value of the asset at the end of the term of the operating lease is 100.00 and the lease firm estimated this as , lets say $50.00 then they have just realized a further $ 50.00 profit on the asset .

So who is the best to understand the actual true value of the lease at the end of the term? Quite frankly, sometimes its you, who understand your business only too well. Alternatively many lease equipment finance firms have significant expertise also. It depends,

The type of lease company you choose to work with also has a significant effect on your interest finance charges. Bottom line, your lease firms borrow funds also. In Canada that’s typically done through insurance companies and banks. So a general rule of thumb is that if your lease finance firm is larger, well funded, and well managed… the bottom line is that your chances of more aggressive lease rates increases.

We hate calling them ‘ games ‘ but the industry uses many nuances in pricing and structure and terms that significantly affect your overall finance charges . What are some of these?

A good example is advance payments you are asked to make, or security deposits. If you are asked me make a significant security deposit ensure interest accrues to your security deposit, at a rate commensurate with the size of the deposit.

Many assets are acquired on an interim rent basis… that has the lessor outlaying cash before you actually sign off on the final acceptance of the asset. It could be a complicated computer project that is being funded, or perhaps a production asset that is being assembled by your vendor in stages.

We’ve highlighted just a few of the basic issues that should come into consideration by your firm when you are concerned about getting those ‘ best ‘ equpment lease rates’ in the Canadian marketplace . There are others.

If there is a bottom line here it simply that it’s worth it to take some time and understand how some up front knowledge and consideration at the start of your lease finance process can positively impact interest finance charges in your favor as the lessee. Speak to a trusted, credible and experienced Canadian business financing advisor who can guide you to the appropriate lease finance pricing for your ongoing equipment needs.

Canada’s Economy- A Fortress or a Sandcastle?

In recent weeks, there has been considerable focus on the growing possibility of another U.S. recession – a risk that we peg at about 40%. This prospect has raised questions about Canada’s ability to withstand such a shock. Despite Canada’s relatively strong economic fundamentals and the continued outlook for growth, the economy is more vulnerable to a nasty external surprise than it was prior to the recent recession in 2008-09. While the business sector appears better positioned to weather a U.S. downturn, policymakers in Canada have less wiggle room on the fiscal and monetary fronts and households face larger debt burdens. In contrast to the experience in the 2008-09 downturn – when Canada’s economy suffered a considerably lesser blow than that Stateside – there is no assurance that a repeat would be in store in the event of a U.S. double dip. At a minimum, the Canadian economy would probably follow the U.S. into recession.

Less scope for policymaker response

One of the bigger differentiating factors is the reduced flexibility of monetary and fiscal authorities in Canada to respond. In 2007, Canadian short-term interest rates stood at 4.25%, government fiscal balances were in surplus and combined government federal-provincial debt was sitting at 54%. Indeed, the subsequent and massive injection of massive monetary and fiscal stimulus helped to prevent a difficult externally-driven, export-led recession from being considerably worse. Canada’s peak-to-trough decline in real GDP during the 2008-09 recession amounted to a sizeable 4%. But if the heavy losses in the export sector are stripped away, Canada’s household and government sectors suffered a much tamer drop of around 2.5%. Canadian job losses during the downturn were also heavily concentrated in the export sector. Today, a short-term interest rate at 1% leaves the Bank of Canada much less room to counter an economic shock without foraying into unconventional monetary policy options, such as quantitative easing. What’s more, with some $166 billion dollars more in outstanding federal and provincial debt (62 percentage points as a share of GDP), governments would be harder pressed to go on another major spending spree.

Household vulnerabilities have risen

The household sector’s flexibility to respond in the event of a severe bout of external headwinds is even more constrained. For one, the jobless rate remains more than a full percentage point above its pre-recession trough. Household debt as a share of after-tax income is considerably higher. It may be the case that the burden of debt service costs is actually lower today than four years ago due to the benefit

of lower borrowing rates. However, that could quickly change if income flows are abruptly cut off as a result of, say, a surge in layoffs. The higher home price-to-income ratio also suggests a larger degree of froth in the nation’s housing market despite the gyrations in home prices since 2007. By our measure, home prices are currently 10-15% over-valued. The bottom line is that household debt leaves households with less financial maneuvering room.

Business balance sheets stronger

Similar to the 2008-09 experience, a U.S. recession would swiftly hit Canada’s economy through the export channel. As such, many businesses would be in the line of fire. Roughly 70% of Canadian exports remain U.S.-bound while roughly one-fifth of business funding is generated in U.S. markets – shares which have not changed materially since 2007. At the same time, however, Canadian businesses would be in a better position to deal with the storm this time around. Businesses, on average, are holding less debt and are have more liquid assets. With commodity prices and the Canadian dollar in the same ball-park today as in 2007, profit margins are on the same magnitude. Another important factor to consider – especially when the level of risk to the Canadian business sector is considered – is the vulnerability of the U.S. economy compared to 2007. While the U.S. still faces a mountain of structural challenges – least of which is its ballooning government debt-load – it is highly unlikely that the economy is poised to suffer a contraction along the same line as that in 2008- 09. Unlike Canada, households and housing markets have

already undergone massive adjustments. Housing starts in particular can’t go much lower. Business balance sheets are also in decent condition notwithstanding the sluggish recovery to date.

Bottom Line

Canada’s economy headed into this summer’s turmoil in relatively good shape and our base case remains one of modest growth. Still we can’t ignore the simple fact that households and governments – two sectors that make up about four-fifths of Canadian economic activity – have a reduced capacity to respond to unanticipated negative events than was the case four years ago. The prevailing view is that if the U.S. economy were to fall into recession, Canada’s economy would likely follow suit. But by virtue of its fundamental strengths, many believe that the downturn would be less severe and the economy would recover more quickly than would be the case south of the border. Given Canada’s increased domestic vulnerability, such an outcome would not be guaranteed.