Is The Wrong Type of Equipment Finance Company Bad For (Business) Health?

They are all the same, aren’t they? Absolutely, positively… not! We are of course talking about the equipment finance company industry in Canada and how your selection of the right partner can determine which advantages and disadvantages you can enjoy… or suffer with. We prefer positive advantages that your business can benefit with, not Canadian business financing decisions that you will suffer via the wrong choice of a lease partner for your specific needs.

Ok, so what in the heck are we talking about? Essentially there are four types of asset finance partners in the equipment leasing industry in Canada. And you thought that a lease finance company was a lease finance company!

The first type of partner is the ‘captive’ – no you are not the captive! The term refers simply to finance companies that are owned and literally situated within various manufacturing firms. When clients ask us about lease finance options and they mention specific equipment we are always reminding them to ensure they determine if the manufacturer captive finance firm offers asset financing. If they do we can assure you it is probably the best financial terms you will be able to come up with, as well as a better chance for overall approval re rate, structure and other general terms. Why is that?

It’s to do with motivation – the captive finance firm is motivated to finance and promote the sale of products using financial options such as leasing to get the products out to the marketplace. Want to know a secret that should surprise most business owners and financial managers? It’s simply that captive finance firms in a competing industry will finance their competitor’s products, often at better rates, terms and structures. That is simply because the financial transaction will probably give the competing mfr a foothold into your business to promote and sell their own products. So don’t think that a great firm such as IBM CREDIT CORP. is the only firm that will finance your products you purchase through them. Others will also!

The second main group of asset finance firms in Canada is our chartered banks – Two major banks have leasing arms that are very significant, others employ lease finance to varying degrees. Our real only comment here is that the credit bar is high and more often than not you have to be a customer of the bank to enjoy the great lease and finance structures they offer.

The third main category of the Canadian equipment leasing company market is actually the largest and most robust. It also requires the maximum amount of knowledge and navigation by Canadian business owners and financial managers. This is the Independent lease finance market, where there are tens of firms that offer lease financing based on various criteria of asset size, credit quality, geographical preference, industry specialization, etc, etc, etc.

You have a great choice with our category 3 partners, the independent finance companies. You can spend tens or hundreds of hours determining their credit criteria, additional collateral they require, the size of deals they do, the different lease structures they offer, or… alternatively.. use our final category for lease provider, the independent lease finance advisor who are knowledgeable intermediaries who know the market, have a strong reputation with lease providers, and can match the advantages you seek in an equipment finance transaction to the right provider. Subtle nuances in your overall lease structure, depending on the size of your transaction, can save you thousands of dollars and untold grief at the end of the term of your lease.

Options on Financing a Business Via P O Financing and Inventory Financing

It’s a good news/bad news situation at its classic best. Your firm has the ability to receive orders or contracts but you are challenged with restrictions or unavailability of inventory and PO (purchase order) financing. Financing a business based on assets such as inventory and orders in coming has never been more of a challenge in Canada.

When we speak to clients we advise there is no one method that seems to handle all inventory and P O finance challenges. But the good news is that via a variety of effective business financing tools you can employ you are in a position to generate working capital and cash flow from these two asset categories. Let’s examine some real world strategies that have made sense for clients.

The root of the problem is simply, you have orders and contracts, but those will potentially be lost to a competitor. Conventional wisdom is that you go to your bank and ask for financing to support inventory and purchase orders. As you may have experienced, we aren’t big believers in conventional wisdom on that matter!

However, utilizing a convention purchase order funding source does allow you to purchase product and get your suppliers paid, thus facilitating you ability to deliver to your customers.

One of the main benefits that many clients don’t realize is that inventory financing and P O financing don’t necessarily require your firm to have a long or strong credit history; the focus on structuring the transaction is around the inventory being financing and the general credit worthiness of your client, who will be paying yourself or the inventory or P O financing firm

The overall process is fairly simply and easy to understand when it comes to putting the transaction together successfully. On receipt of your confirmed purchase order your supplier is paid via cash or a letter of credit. Your firm of course completes final shipment of the product, which typically involves some additional time on your firms part. On shipment and of course payment from your customer the transaction is in effect settled. In a true pure po financing scenario the P O funder is paid immediately on your invoicing of the product. That is facilitated by your firm selling the receivable via a factoring type transaction as soon as you have generated the invoice.

There are always limitations to this type of financing – so things we look for early in the transaction are the ultimate remarket ability of your product in case there is a transaction risk. Naturally, as we stated, the overall credit worthiness of your customer is key, his receipt of goods and payment in effect closes the transaction.

Inventory financing and PO financing are generally more expensive than traditional financing, due mainly to the significant transaction risk that the lender takes. Therefore we strong recommend that your firm has solid gross margins in the 25% range to cover the associated costs of a po financing, inventory financing transaction that also factors in the time it takes to get paid by your client, as that typically adds 30-60 days on to the whole cycle of the transaction.

If there is one great tip of ‘ secret’ that we share with clients its simply that the best method of ensuring financing in the manner we have outlined is to consider an asset based line of credit. Coupled with a facility that will finance your purchase orders this is the ultimate working capital tool that will allow you to grow business quickly and significantly. This type of facility is generally a non bank facility and is offered by independent finance firms.

Four Tips For Financing Your New Car

Whilst buying a car is without doubt an exciting time, it can also be stressful and costly. Most people (at least 80%) cannot afford to buy a new car outright. Therefore, most car buyers acquire a new car using a deposit as down payment and obtain car finance to fund the rest. The following five tips are valuable for people considering obtaining a new car as they give different options on how to best to fund the transaction.

1. Sell your current car privately instead of a part exchange – Whilst it is much more convenient to ‘trade in’ an existing vehicle as a part exchange on a new vehicle this will not maximise the money you get for your car. Done primarily for ease and convenience (if you put your car in as part exchange against a newer model you remove the whole selling process, advertising costs, people calling around your home to view the car and being annoyed by phone calls for weeks after the car has been sold), it is a known fact that a part exchange is the least profitable way to sell your car. Therefore, if you have the time and patience, it is advised that you opt for a private sale. Perhaps the best way to determine whether you should part exchange or sell is to determine the market value for your vehicle and compare this with some part exchange values. Whatever the difference between the two can be considered your payment for the hassle of private sale and therefore you can make an informed decision.

2. Car Finance From A Dealership – This is the most popular way to finance a car. Dealers provide approximately 65% of all car finance. The reason for this is that people shop for cars based on the price of the car and because 80% of all new car buyers need finance they end up taking finance from the same dealer that provides the best price on the car.

Dealers typically offer hire purchase or car leasing. Hire purchase is an arrangement where people sign a contract to make monthly payments across 3 – 5 years and they end up owning the car at the end of that payment period. Leasing is slightly different because it is often much, much cheaper you can have the option to buy the car at the end of the period or simply return it to the dealer. However, you must be careful with dealer finance (or any car finance for that matter) and you should always shop around and compare the monthly deal that you have been offered. Just because you negotiated a good price on the car doesn’t always mean that you are getting a good monthly price on the finance. In some cases the monthly payment could have a premium hidden in it with a high APR and therefore the calculation of your monthly payment may not relate to the ‘good price’ that you think you negotiated on your car. Therefore, shop around and compare the monthly payment, the total payment ensuring that you are comparing the same contract period etc with different dealers and finance providers irrespective of the price that you have negotiated on the car.

3. Car loans from a bank – Personal car loans account for only 13% of all new car finance. This is surprising because other than using cash, this is the only form of finance that enables the borrower to own the car from the point of purchase. Therefore, whilst most people think they own the car that they are driving, if they bought the car with finance and are still making monthly payments, then approximately 87% of all new cars are not actually owned by the drivers.

If you are thinking of purchasing a car using a car loan of some form you should always shop around based on APR. There are various comparison websites that enable you to compare car loans but you should always be careful about two things:

(i) the Apr that the website quotes to you is unlikely to be the one that you get. This is most likely the best APR you could get and it is often adjusted to meet how much of a ‘risk’ that bank may think you are;
(ii) do not submit too many applications for finance. If you submit three or four applications to different banks and you are refused by all of them, you might damage your credit record and make it difficult for you to obtain finance in the future. Some finance websites enable you to apply for a loan and they can advise you whether or not you are likely to succeed and this can be a safer way to apply

4. Lease your new car – As discussed above, car leasing is most often the cheapest way to finance your new car. In fact, according to the Finance & Leasing Association, in the first 6 months of this year it was the most popular form or finance provided by dealers. When making a decision on car finance, be sure that you actually need to own your next car? If so, then the only form of finance that permits this immediately is a personal loan from a bank – remember, with hire purchase you will not own the car. If ownership is not so important, then leasing is a cheap form of finance – but you must have a good credit rating. There are many benefits with car leasing as it allows you to receive a new car every few years (although this can change, depending on the lease agreement) without the hassle of a part exchange. However, make sure that you are familiar with the disadvantages (you need to agree an annual mileage limit) and as always be sure to shop around and compare like with like on all alternative car leasing deals.

Starting a Franchise? Looking For Business Money To Finance A Franchise?

The priority of securing business money when you have selected and are starting a franchise becomes even more important as you focus on getting the business started and up and running.

Let’s discuss some of the sources of capital in the Canadian franchise environment, and we’ll share some tips and strategies that have helped many other clients looking for Canadian business financing in the franchise environment.

There are actually 5 sources of capital that will successfully allow you to complete the financing of your new business. They include your own equity injection into the business, i.e. your down payment, bank and institutional financing (its not what you might think, so stay tuned on that one ), asset financing via an independent finance company, and finally a potential vendor take back from either the franchisor of the existing franchisee from whom you are buying the business.

Let’s therefore backtrack a bit and hopefully give you some solid tips and new information around how this financing is, in our words ‘ cobbled together ‘ to give you a total financing solution for your new business.

It’s always the same question when we talk to clients… ‘How much do we have to put in ‘… they are of course referring to their owner equity investment into the business. The truth is that the amount varies when it comes to the financing portion of your business. That amount is flexible and can vary anywhere from 10 – 50 per cent depending on the size of the financing and the amount of working capital you want to have on hand d on day once that will allow you to finance the business properly.

Another tip we’ll share in the above mentioned ‘ owner equity ‘ area is simply that in many cases some franchisors will actually mandate how much you ‘ have ‘ to put in. We therefore recommend to all clients that they get a clear understanding up front so there are no surprises. In defense of the franchisor they are probably relying on their own experience that allows them to have determined over time what it takes to successfully run and grow one of their units in their franchise system.

So how exactly do the banks in Canada participate in the starting of your franchise? Is it as simple as approaching your bank and determining what business money they will lend to finance a franchise? Not really we tall clients. We have rarely if ever seen a direct term loan to cover the financing of a franchise. But yet the banks do participate in most of the franchise financing in Canada. How? They piggy back on a special government program called the BIL/CSBF programme. This loan is underwritten by Ottawa, and has very generous terms and conditions around rate and structure. Unbelievably you are actually only guaranteeing personally 25% of the loan, which is another benefit.

So our cobbling together of a financing package is getting there – another great strategy is to finance separate individual assets with an independent lease firm. This type of asset financing is easier to get approved, and can cover a significant portion of any assets that need to be financed.

We spoke of a potential vendor take back from the franchisor or existing franchise as part of the purchase package. We will share with you several tips and comments on this one – namely that you should not fully rely on getting this type of financing in place. Occasionally you might be successful, may times you wont. Why? Simply because the franchisor or existing franchisee is motivated to sell you a franchise, not finance it!

Speak to a trusted, credible, and experienced Canadian business financing advisor in the area of starting a franchise and getting the right business money in place to allow you to complete your new role as a Canadian entrepreneur.