Human nature craves the familiar and longs for security. We naturally want to minimize risk – especially where money is concerned! When it comes to securing financing to help you operate your business, the tendency is to stick with what’s familiar without really exploring all of the viable options available.
Many people opt for financing through their bank by default, automatically assuming it’s your best financing option. At the very least, we’ve all worked with our banks to obtain accounts to run our business. Most likely, you’ve also used the bank to get a mortgage, personal loan, line of credit, or some other form of financing. Maybe you have RRSPs at the bank, or other investments. It’s familiar.
Before making a final decision about your financing options, consider the following:
Required Security
Banks require a great amount of security.
Generally speaking, banks require significantly more security in order to provide you with financing.
- It is not uncommon for them to demand 2-3 times the amount they are lending you as security against your loan.
- Even though you may be looking for financing for your business, they will most likely require that you personally sign for it (a personal guarantee).
- Sometimes a bank will file a General Security Agreement (GSA)* against your company.
Alternatively, not all equipment leases require a personal guarantee and very few require a GSA. The security required for a lease is typically less onerous than what is required with a bank.
Convenience At A Cost
Banks may seem more convenient, but do you know why?
The bank already has all of the necessary information (and, in most cases, a lot more information) so they don’t need you to provide it to them all over again. The bank already has your mortgage and investments, RRSPs, etc. They have a full picture of your personal net worth because of these things. Not only that, if you have existing loans, you may be submitting financial statements to them regularly already.
So, it may seem that obtaining a lease requires more effort on your part because of the information a leasing company asks you to provide. The flip side is that equipment leasing never requires you to submit financial statements throughout the course of the lease contract. And there is a certain level of comfort in having some assets that your bank does not own.
Debt Diversity
Diversifying your debt is equally important as diversifying your investments.
There is wisdom in the old adage, “Don’t put all your eggs in one basket.” If it’s true for investing, why wouldn’t it also apply to debt? For more detail on this, read Why You Need To Diversify Your Debt.
A note about lines of credit: Using a line of credit for equipment purchases can be detrimental to your business. A line of credit is actually a “demand loan”. This entitles the bank to reduce or revoke the loan at any time. Interest rates are also subject to fluctuations.
Regulated Financing
Banks are regulated by laws, but so are leasing companies.
It is a myth that a bank gives offers more protection because of the laws and regulations that hold them accountable. Equipment lease financing is absolutely regulated and under stringent laws just as are other financial institutions in this country. Like bank financing, lease financing requires signed legal documents, which are legally binding and hold both the lessor and lessee accountable. This is not a “loan shark” or “shadow market” scenario.
If you are intimidated by the unfamiliarity of equipment lease financing, please don’t hesitate to contact us at Lease 1 Financial. It is very important to us to educate others about lease financing and it would be our pleasure to provide you with further information about what equipment leasing is and how it works. For starters, you may want to read some of the posts about equipment leasing:
Equipment Leasing vs. Bank Loans
* “A GSA is a common form of security often used to secure commercial loans or credit arrangements. It can be an effective way to obtain security over the assets owned by a person or company.
When entering into a GSA with your bank, you or your company will often be asked to provide security over all of your present and after-acquired property, meaning the bank will have security over everything you own now and everything you will own in the future.
The primary remedy of a GSA is that if you are in default of your obligations, the secured party can take possession of and sell the secured property. If a Company defaults on a GSA, the secured party can appoint a receiver (in accordance with the Receiverships Act 1993) to manage the company’s affairs. The receiver is then able to sell off Company assets in order to repay debts to the secured party.” (Source)
