Rent to buy, or simply rent. Obtain your major business assets without causing a cashflow crunch.
Finance and operating leases – two ways to make your business cash go further
Most Canadian businesses need expensive assets to produce the goods and services they sell. These assets are typically cars, HGVs, plant and machinery. Without them, many businesses simply cannot function. However, buying big-ticket items can create problems with cashflow and for companies with seasonal finances, spending a large sum all at once may be impossible. But not to worry. Say hello to finance and operating leases – two low-cost ways for businesses to secure the major tools they need.
What is a finance lease?
A finance lease is a method of financing business assets, and it works as a long-term rental agreement, with the assets remaining the property of the finance company (also known as the lessor) that hires them out, and the lessee (you) paying for the hire of the assets. The lessee has the option to buy the asset at the end of the contract period.
How do they work?
A finance lease allows your business to use an asset for a fixed period and for a fixed monthly rental cost. At the end of the agreement the business will have the option to purchase the asset for a pre-agreed sum. A finance lease allows businesses to spread the cost of the asset over time and with lower monthly payments than if they were to purchase the asset. In many cases, (except company cars), businesses may reclaim 100% of the VAT element of the monthly cost – including any service and maintenance charges.
What is an operating lease?
An operating lease is also a method of financing business assets, and like a finance lease, it works as a long-term rental agreement, with the assets remaining the property of the finance company (the lessor) that hires them out, and the lessee (you) paying for the hire of the assets. However, unlike a finance lease, the lessee has no option to buy the asset and it will always return to the lessor at the end of the contract period.
How do they work?
An operating lease is a low-cost way for businesses to obtain the big-ticket items they need. Unlike purchase loans, the lessee, (you) does not buy the asset, you rent it and you cannot purchase the asset at the end of the contract.
In most cases (especially with business vehicles), the agreement will include a Residual Value that is based on the period of the lease and the estimated value of the asset at the end of the contract. At the end of the agreement the asset is usually sold to a third party on behalf of the finance company. If the asset sells for more than the Residual Value, the finance company will refund a percentage of the surplus back to you. If the asset sells for less than the Residual Value, you will be liable to make a further payment to the finance company.
An operating lease allows businesses to use the asset for a lower monthly cost than buying the asset with hire purchase. Operating leases may come with included maintenance and repairs. In most cases, (except for company cars), businesses may reclaim up to 100% of the VAT element of the monthly cost – including any maintenance or service charges.
What’s the difference between the two?
An operating lease may have better tax advantages and come with lower monthly payments and require a smaller deposit than a finance lease. Other key differences include:
|Finance lease||Operating lease|
|Long term rental agreement?||Yes||Yes|
|Option to purchase the asset at contract end?||Yes||No|
|Lower monthly cost than HP agreement?||Yes||Yes|
|Includes maintenance and service?||No||Yes|
|Comes with a residual value at the end of the contract?||No||Yes|
Which is best for my business?
It depends on your business’ acceptance of risk, your tax position and your long-term capital goals.
An operating lease is good for businesses that would rather not deal with the maintenance or administration required with some assets, and they are usually more tax efficient for businesses that don’t want their assets to showcase under an accounting record. Alternatively, financial leases are good for businesses who want to buy assets without a large upfront cost, and at a lower monthly cost and with greater tax advantages than they may enjoy with a standard hire purchase agreement.
How Swoop can help
Finding the best finance or operating lease for your business can be a complicated task, with a myriad of different rules, lease options, and tax considerations to navigate. Business owners seeking this type of funding may find themselves forever searching and making applications to lender after lender. Instead, working with a broker, who can access finance and operating leases from a wide range of lenders is a better way to go. No more cold calls and endless demands for information. Even if you’ve been turned down elsewhere or have bad credit, simply tell us what you need and leave the rest to us.
How do I get started?
Register with Swoop to find the best rates, the best terms and the best operating leases for all your business needs.