Size the decision honestly before you do anything else
A purchase is major when the payments would be material to your monthly cash flow, when the lender's security will reach beyond the equipment itself, or when the asset changes what the business can sell. A $60,000 truck for a company doing $4 million in revenue is a phone call to your bank. A $900,000 production line for the same company is a different animal: it will carry a multi-year debt schedule, it may trigger a general security agreement over everything the company owns, and it commits you to a level of throughput you have to actually achieve. The preparation below is for the second kind.
The first honest question is why the equipment earns its keep. There are only a few good answers: it wins revenue you currently turn away, it removes a cost you currently pay, it replaces a machine whose downtime or repairs are already bleeding you, or a contract in hand requires it. Write the answer down in one sentence with a number attached. If you cannot, the problem is not financing readiness, it is the purchase case itself, and no lender package fixes that.
The second question is timing. Equipment decisions made under pressure, the old machine died, the vendor's quote expires Friday, a contract starts next month, get worse terms and worse structures than the same decision made a quarter earlier. If you can see the purchase coming, start the preparation now, while you still have the leverage to walk away. A business that arrives at its lender with a projection, clean statements and two competing quotes is negotiating. A business that arrives with an invoice is asking.
Build the projection the loan will live inside
The projection that supports a major equipment decision is a monthly cash flow forecast covering at least the first two years of the loan, showing where the payments come from and what the equipment adds. Lenders read projections for one thing: whether the story and the arithmetic agree. Revenue attributed to the new equipment should tie to something real, a signed contract, a documented backlog, quoted work you had to decline, historical utilization on the machines you already run. A hockey-stick forecast with no anchor reads as hope, and credit teams price hope badly.
Build the forecast around how the equipment actually enters service, not how the brochure says it will. Most major equipment has a ramp: delivery lag, installation, commissioning, operator training, the first months at partial utilization. Those months have full loan payments and partial revenue, and they are exactly where under-prepared borrowers get squeezed. Put the ramp in the forecast explicitly and make sure the cash holds through it, including the deposit the vendor wants up front and the HST you pay on the purchase before the input tax credit comes back on your next return.
Then stress it. Run the same forecast with revenue coming in slower than planned, with the ramp taking twice as long, and with rates higher if any of your borrowing floats. You are looking for the point where the plan breaks, because the lender will look for it too, and because knowing your own break point tells you how much cushion to negotiate into the operating line. A projection that only works in its best case is not a plan, it is a pitch.
This is the work behind the phrase owners search for, business financing and projections from a CPA in Ontario: not a template spreadsheet, but a forecast built from your actual margins and your actual pipeline, in a format a credit team recognizes. We build these as part of our financing support work, and the same model keeps serving you after the advance, because it becomes the budget you measure the equipment against.
Run the lender's math before the lender does
The number that decides most equipment financing is debt service coverage: the cash flow the business generates, measured against every principal and interest payment it is committed to, including the new one. Lenders typically want cash flow comfortably above total payments, often around 1.2 times or better, calculated on your historical statements as well as your projection. Run this yourself first, on all of your obligations together: the existing term loans, the vehicle loans, the leases, the shareholder loans you actually intend to repay, and the new payment at a realistic rate.
Two adjustments matter when you run it. First, add back what lenders add back: owner compensation above a market wage, one-time costs, and non-cash items like amortization. If your statements show thin profit because you drained the company to the shareholders in dividends, the file has to make the real cash generation visible, and that is a presentation problem your accountant should solve before the bank sees it. Second, subtract what lenders subtract: a realistic maintenance and replacement reserve, and the tax the corporation actually pays.
Look past the ratio to your operating line. A major equipment loan changes your working capital picture: the deposit, the HST timing, the ramp months and the new monthly payment all draw on the same line that funds your receivables. Part of preparing is deciding whether the line needs to grow alongside the term debt, and asking for both in one conversation rather than coming back six months later looking stretched. Lenders read a combined, forward-looking request as planning. They read the second visit as trouble.
If the coverage math fails, the preparation has done its job early. The answer might be a longer amortization, a larger down payment, a used machine instead of new, deferring six months to bank more cash, or accepting that the contract driving the purchase is not profitable enough to carry it. Every one of those is cheaper to discover in a spreadsheet than in a default.
Settle the transaction structure before you sign anything
Which company borrows, and which company owns the asset, should be decided before the credit application goes in, because it is expensive to change afterward. For a single-corporation business the answer is usually simple: the operating company borrows and owns. Once there is a holding company, related companies, or plans for either, the structure is a real decision, and the lender's security requirements will shape it as much as tax does. The same trade-offs we walk through for buildings in how financing affects property ownership structure apply to major equipment at a smaller scale.
| Structure | Where it fits | What to watch |
|---|---|---|
| Operating company borrows and owns | The default: one entity, the asset serves its own revenue | Equipment and the loan sit inside operating risk; the lender's general security agreement usually covers everything the opco owns |
| Holdco or sister company owns, leases to opco | Groups that keep assets away from operating risk, or one asset serving two related companies | Lender will want guarantees from the entity with the cash flow anyway; the intercompany lease must be real, priced and papered, with HST handled |
| Vendor or manufacturer financing | Fast approvals, promotional rates on new equipment | Compare the whole term sheet, not the rate; watch buyout terms, insurance requirements and what happens on early payout |
| Government-backed small business loan | Younger or thinner-equity businesses buying equipment or leaseholds | A federal guarantee program most banks offer; registration fees and caps apply, and the paperwork standard is stricter, not looser |
Whether to finance or lease the machine is its own comparison, and it is mostly a cash flow and flexibility question with a tax timing difference, not a tax windfall either way. What matters at the preparation stage is refusing to let the vendor's financing desk decide your structure by default. Get the cash price, the finance terms and the lease terms as three separate numbers, then compare them after tax over the years you will actually keep the asset.
One structural warning from files we have cleaned up: do not let a major asset land in the wrong company because that is where the bank account had money. Moving equipment between related corporations later is a taxable transfer unless it is done under the rollover provisions with elections filed on time, and unwinding a casual arrangement costs more than papering the right one would have. Ten minutes with your accountant before the purchase order beats a reorganization after it.
Assemble the file: due diligence on the deal and the lending package
A complete lending package answers the credit team's questions before they ask them, and it has a standard shape: two to three years of financial statements, interim statements for the current year, the projection with its assumptions written out, corporate tax filings up to date with no balances owing, a summary of existing debt and security, the equipment quotes, and a one-page cover memo saying what you are buying, why, and how it repays. Statements prepared by a CPA carry more weight than internal bookkeeping exports; if yours are behind or home-made, a compilation engagement is usually the fastest way to make the file bankable.
Due diligence runs in both directions, and the borrower's side gets skipped far too often. On the equipment: total cost of ownership including delivery, installation, electrical or site work, training, spare parts and the service contract; the vendor's stability and parts availability in Canada; warranty terms; and resale value, because the gap between price and resale is your real exposure. On a used machine: an independent inspection and a lien search, since equipment can arrive with someone else's security interest still registered against it.
On the financing side, read the security package as carefully as the rate. Know whether the lender is taking the equipment alone or a general security agreement over the whole company, whether personal guarantees are required and for how much, what insurance you must carry and assign, and what the prepayment terms are if you sell the machine or refinance early. These clauses are negotiable exactly once, before you sign. Registered security follows the asset, and a guarantee signed casually in a good year is still there in a bad one.
Then get a second quote. Your own bank, an equipment finance company and the vendor's captive lender will often price the same purchase three different ways, and the differences show up in term, security and covenants as much as rate. Businesses that borrow well treat financing as a procurement decision, with the same discipline they apply to the equipment itself.
After the advance: covenants, lender reporting, and what changes the answer
The financing decision is not over when the money lands, because a major loan usually comes with covenants and a reporting schedule, and breaching them by neglect is the most avoidable way to damage a banking relationship. Typical requirements: annual financial statements delivered within a set number of months of year-end, sometimes interim statements quarterly, a minimum debt service coverage ratio tested annually, and restrictions on further borrowing, dividends or asset sales without consent. Read them before signing, then put them in a calendar.
Covenants deserve two specific habits. First, calculate your own covenant numbers at every year-end before the statements go to the bank, so a tight year is a conversation you start rather than a letter you receive. Lenders have far more flexibility for a borrower who calls ahead with a plan than for one who goes quiet. Second, watch how dividend and salary decisions interact with the coverage covenant: a compensation plan that made sense tax-wise can walk you into a technical breach, which is why the tax file and the banking file need to be planned by the same people.
The facts that change how you should prepare, and sometimes whether you should proceed at all:
- Payment size relative to monthly cash flow. The bigger the ratio, the more the projection and the stress test matter.
- How the equipment earns: a signed contract supports aggressive timing; speculative capacity argues for a slower, cheaper machine.
- The state of your statements. Clean, CPA-prepared, up-to-date filings widen your lender options and compress your timeline.
- Your existing debt and security. A general security agreement already in place constrains which lenders can even take this deal.
- Your corporate structure, because who borrows and who owns is cheap to decide now and expensive to change later.
- Where rates sit against your margins, since a thin-margin business carries rate risk the projection must price in.
Walla built her practice on the lender side of this table, in banking and corporate finance, before founding Tauro, and it shows in how we prepare these files: as credit applications, not shoeboxes. For a single purchase we run it as a defined-scope strategic project, from the purchase case through the projection, structure and package. If the bigger question behind the equipment is premises, start with lease vs buy for commercial property. Either way, the first step is a free 15-minute discovery call, and the honest first deliverable is the coverage math.
