Equipment financing

How it works

Equipment finance funds machinery, vehicles, technology, or other qualifying assets. A loan normally supports a purchase; a lease provides use under specified terms. The asset often forms part of the lender’s security, but extra collateral or guarantees may still be requested.

Where it can fit

Estimate the useful working life, maintenance needs, and incremental cash generated by the asset. A productive machine with measurable output is different from equipment that quickly becomes obsolete. Supplier quotations and installation costs help define the real funding need.

Look closely at the trade-offs

Check the down payment, delivery milestones, residual or buyout amount, insurance requirements, and security release. Taxes, installation, training, and maintenance may not be included. A lease payment can look attractive while leaving a material end-of-term obligation.

Price the equipment once it is ready to work

The supplier price is the start of the budget. For a fictional machine costing $80,000, add $6,000 for delivery, $4,000 for installation and $3,000 for training. The resulting $93,000 project cost is already $13,000 above the sticker price, before any taxes or operating buffer.

Assume a proposed facility finances $64,000 and the rest must come from the business. The cash contribution is $29,000. Do not assume that a lender finances delivery, tax, training or used equipment on the same terms as the machine itself. BDC’s equipment guidance identifies additional project costs and the need to understand the proposed financing.

Source: BDC: equipment financing

Compare loan and lease cash flows to the same endpoint

Suppose one fictional purchase option requires $20,000 upfront and 48 payments of $2,100, with no balance left at the end. That is $120,800 of listed cash outflows. A different fictional lease asks for $5,000 upfront, 48 payments of $1,800 and a $15,000 purchase option. Exercising that option brings the listed outflows to $106,400.

Those totals alone do not decide which agreement is better. This simplified comparison assumes the same equipment and excludes taxes, maintenance, insurance, fees and the time value of money. An option based on future market value would not provide the same known $15,000 endpoint. CSI Leasing’s guide illustrates that returning, extending or purchasing equipment can each have their own process and conditions.

Source: CSI Leasing Canada: end-of-lease guide

Test the installation period and a slower start

If the machine is expected to add $4,000 of monthly cash contribution before finance payments, first define what costs have already been subtracted. Using the hypothetical $2,100 payment leaves $1,900. If contribution is only $2,500 during the first three months, the remaining amount is $400 per month before any costs omitted from the estimate.

That makes commissioning delays a financing question. Put delivery, installation, staff training and first customer receipts on a calendar. The payment may start before the equipment generates cash. A reserve for that gap needs to appear in the funding plan rather than being assumed to come from future sales.

Put the end of the agreement on the calendar now

Before signing, request the written rules for ownership, purchase options, return condition, notice deadlines and removal costs. Keep serial numbers, acceptance documents and the payment schedule together. These are practical file questions; the answers depend on the supplier, finance provider and contract.

The sources here include Canadian provider guidance. They do not establish the tax or accounting result of your equipment arrangement in either country. Ask your accountant to evaluate the actual documents before comparing after-tax costs.

Source: CSI Leasing Canada: end-of-lease guide

Ask your broker

• What part of the full installed cost is financed?
• When do payments begin relative to delivery and acceptance?
• What must we pay or do to own or return the equipment?

Your next-step checklist

• Equipment quote and specifications
• Delivery and installation schedule
• Asset age and useful life
• Full payment and buyout schedule