Entrepreneural Issues
Chapter 19
Leasing by Small Businesses
During business downturns, many small businesses find it difficult to get small business loans from banks. Many firms have sought lease financing as an alternative to traditional bank financing. In addition to its greater availability, firms that have made use of lease financing cite the following advantages:
- Less cash required up-front
- Better protection against obsolescence at the end of the lease term
- Quicker approvals from lessors than from lenders
- Fewer restrictive covenants from lessors than from lenders
However, these advantages do not come cheap. Lease financing often entails high effective interest costs relative to borrowing. Thus, while leasing has gained favour among small firms as a quick and flexible financing alternative, these benefits have typically come at a high cost.
In April 2002, the Canadian government launched a unique, five-year, pilot project to guarantee small business capital leases up to $250,000 for eligible small businesses. The pilot project guarantees up to 85 percent of a lessor’s eligible losses on capital leases in the event of default. Thus, lessors will be encouraged to provide more leased assets to small businesses at more favourable rates. This program is the first of its kind in the world.
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