#044 Leasing: a meaningful equipment acquisition option

You need to purchase new equipment to support the operation of your business, but you are concerned about increasing your debt during this time of global uncertainty.

Have you considered leasing? Let's consider this option together and how it could benefit you.

First of all, let's look in comparison at the terms of leasing, also informally called leasing.

Financing terms

Cash Purchase: To gain access to equipment, such as a forklift, surgical laser, or commercial ice cream machine, you can simply purchase it. The most basic option is to pay for the equipment in cash, out of the acquiring company's cash flow. This equipment is therefore recorded as an asset on the company's balance sheet.

Traditional borrowing: If you don't have the money or don't want to spend your cash, you can borrow an amount from your bank. On the other hand, this will have the immediate effect of reducing your borrowing capacity, that is to say the possibility of borrowing a new amount to acquire other equipment in the future. For example, if your bank has determined that you can borrow up to $100,000 and they are financing a truck for $75,000, they will not be able to grant you a new loan of more than $25,000 the next time you apply. .

Rental : You rent equipment for a sum of money for a period of time determined by a rental contract and you return the equipment to the rental company at the end of the term. You therefore do not own the equipment, however you can treat the amounts paid as a tax-deductible expense.

Leasing: Your financial institution purchases the equipment for you from a selected supplier and leases the equipment to you, which you pay for in equal monthly installments over a period of 24 to 72 months. The leasing contract options offer the possibility of purchasing the equipment from the bank after the rental period. You are therefore renting with a view to becoming an owner, as is the case with a mortgage.

How does leasing benefit you?

Leasing allows you to maintain your borrowing capacity.

All bank financing requests are assessed according to the debt ratio, which means that financial institutions will look at the ratio between your income and your debts. Because leasing is considered a monthly expense rather than a debt, it does not affect your borrowing capacity. So, if we take our previous example, you could finance your truck for $75,000 on a lease, and you would still have the option to borrow up to $100,000 from the bank.

The lease payment is 100% tax deductible.

As this is a rental payment, your monthly payments are counted as a business expense and are therefore 100% tax deductible. This is a considerable tax advantage.

Sales tax is paid through regular installments.

Sales taxes on your equipment are paid by the financial institution financing your lease when ownership transfers from the supplier to it. The sales tax therefore does not have to be financed or paid all at once when signing the lease. The lender pays sales tax to the supplier and, since the lease is taxable, the customer will end up paying sales tax (GST/QST) on their monthly payments. This allows the company to retain more liquidity instead of financing taxes or paying them all at once.

To apply for leasing financing

Leasing is an advantageous solution for acquiring equipment and machinery for commercial use. Leasing is used in several sectors of activity, such as medical, industrial and agricultural sectors, transportation, forestry, printing, restaurants, construction, excavation, snow removal, and much more. Whether it is new or used equipment, it is possible to finance it through leasing as long as it respects the basic principle that the equipment is for commercial use.

If you wish to explore your options, we invite you to consult a financing broker to discuss your projects and your needs. Below you will find the contact details of a partner with whom Experts QBO has worked for several years, who will be happy to advise you.

Yannick Shimwa, Financing Broker

EQUIPMENT FINANCING, REFINANCING & WORKING CAPITAL

C: 1-581-849-5946

E: yannick.s@fincofinancialgroup.ca