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SME Financing in Canada, 2002 — Part I: Leasing

Lease Financing : An Attractive Option for Some SMEs

A lease contract is an agreement under which the owner of an asset conveys to the user the right to use the asset in return for a number of specified payments over an agreed period of time. The owner of the asset is referred to as the "lessor" the user of the asset is known as the "lessee".

Generally speaking, there are two types of leases: capital and operating. A capital lease is a contract which transfers substantially all of the risks and benefits of ownership of the leased property to the lessee. The lessee is responsible for maintenance, taxes, and insurance costs. An operating lease does not transfer substantially all the benefits and risks incident to ownership of property and the lessee can acquire the use of equipment for just a fraction of the useful life of the asset.

Since leasing is simply a way of acquiring an asset without paying cash, taking a loan, or employing other forms of financing, just about anything can be leased. According to the Canadian Financing Leasing Association (CFLA), Canada's leasing industry has a portfolio of nearly $100 billion with business customers and consumers in Canada. The CFLA estimates that approximately 60 percent of the industry's customers are SMEs. Leasing allows SMEs to obtain an asset while keeping debt off their balance sheets. For many SMEs, leasing makes economic sense. When cash is tied up in fixed assets, it is not available to finance inventory, production, distribution or marketing. For this reason, many owners seek to lease assets. Other attractive features of lease financing include:

• long-term financing, usually at a fixed rate;
• possibility of upgrading equipment at the end of a lease contract;
• lower transaction costs; and
• sales-tax deferral in a capital lease.

According to the CFLA, SME leases are used primarily for the following types of assets:

• automobiles and light-duty vehicles;
• machinery and equipment;
• computers and computer equipment;
• heavy-duty trucks;
• office equipment other than computers; and
• buildings or land.

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