iconAbout CFLA: Introduction

Asset-based financing raises Canadian living standards

“Asset-based financing, investment and economic growth in Canada” a recently published groundbreaking study prepared by The Centre for Spatial Economics, a respected, independent group of economists who are also retained by the federal Department of Finance, has found that: “the rise in asset-based financing from 1992 to 2002 improved living standards in Canada by 2.3% (or about 8% of the 26.8% increase in Canadas living standards over that period)”

Asset-Based Financing Expands the Pool of Capital and Credit

Asset-based financing is the financing of particular equipment and vehicles and related items or services, primarily by way of lease, but also by secured loan or conditional sales contract.

The specific assets financed secure the borrower's unconditional obligation to make payments over the term of the agreement. In this way, users of equipment and vehicles can use the value of the asset as security to finance its acquisition. This form of financing relies on cash-flow-based credit analysis. Because the financing company retains legal ownership of the asset until the lease end, it allows a business or person to qualify on generated cash flow rather than on a net worth lending formula basis as typically offered by traditional lenders.

The services of the leasing industry are complementary to traditional banking and other financial lending in providing incremental capital to increase the pool of available credit in Canada and provide a vital competitive alternative in the financial services sector.

Industry Profile

The 200 members of the Canadian Finance & Leasing Association (CFLA) are active in the asset-based financing, equipment and vehicle leasing industry in Canada. Members range from large multinationals to national and regional domestic companies, crossing the financial services spectrum from manufacturers' finance companies and independent leasing companies, to banks, insurance companies, and suppliers to the industry.

The asset-based financing and leasing industry is the largest provider of debt financing to business customers and consumers in Canada after the traditional lenders (banks and credit unions).

In 1998, the federal (MacKay) Task Force on the Future of the Canadian Financial Services Sector reported that the assets of the asset-based financing and leasing industry in 1997 totaled $50 billion1. By 2007, the value of assets financed had risen to $105.4 billion. But, with the worldwide economic crisis of 2008-2009, total assets financed in Canada declined by the end of 2009.

What is Asset-Based Financing?

Asset-based financing is the priority financing of equipment, vehicles and related assets primarily by way of lease, but also by secured loan or conditional sales contract.

The specific assets financed are the principal security for the borrower's unconditional obligation to make payments over the term of the agreement. In this way, users of equipment and vehicles can use the value of the asset as security to finance its acquisition. This form of financing relies on cash-flow-based credit analysis. Because the financing company retains legal ownership of the asset until the lease end, it allows a business or individual to qualify on generated cash flow rather than on a net worth lending formula basis as typically offered by traditional lenders.

Funding for this industry generally came from commercial markets, notably from pension funds, insurance companies and banks. In addition, well-capitalised manufacturing and servicing companies with substantial earnings have decided to leverage their own equity base and core competencies rather than using third parties. This has led to many manufacturers establishing their own financing arms or partnering with those who manage it for them. (See “Three Decades of Federal Policy ~ Impact of the current credit crisis” below.)

The services of the leasing industry are complementary to traditional banking and other financial lending in providing incremental capital to increase the pool of available credit in Canada and provide a vital competitive alternative in the financial services sector.

The Industry ... At A Glance

According to Statistics Canada, total public and private sector spending on machinery and equipment in 2010 was expected to rise 2.8% to $100.7 billion. Significant capital spending increases from the public sector for infrastructure projects, mining and oil and gas extraction sector as well as the manufacturing sector were behind that anticipated increase.2

The market size estimates generated based on the 2010 CFLA Survey of Industry Activity (industry data as at December 31, 2009) indicate that the value of finance assets shrunk 15% from $103.5 billion in 2008 to $87.7 billion while new business fell 23% to $29.6 billion in 2009.3

Asset-Based Financing Market in Canada
  2009 2008 08-09 %ch
New Business Total ($billions) 29.6 38.3 -23%
Commercial Equipment 10.7 15.6 -31%
Commercial Vehicles 2.4 2.9 -16%
Retail Vehicles 16.5 19.8 -17%
Assets ($billions) 87.7 103.5 -15%
Commercial Equipment 34.4 42.4 -19%
Commercial Vehicles 6.9 11.7 -42%
Retail Vehicles 46.4 49.4 -6%

Note: figures may not add perfectly due to rounding

The recession and lack of liquidity stifled retail vehicle leasing activity with new business and finance assets falling 17% and 6% respectively. Equipment and commercial vehicles new business fell 30% and 27% respectively in 2009. Commercial equipment finance assets fell 19%, commercial vehicles fell 42% while retail vehicle finance assets slipped 6% in 2009.

The current market estimates indicate that about 13.4% of new business equipment purchased in Canada is financed by the industry; down from 16.3% in 2008. This sharp decline was a result of the lack of liquidity for the industry and is expected to be partially reversed in 2010. Consumer vehicle leasing slumped in 2009 to just 7% of the retail new vehicle market (down from 45% in 2005) as major companies temporarily exited the leasing market and consumer and commercial demand was hampered by the recession.

Survey respondents expectations for 2010 are mixed, with equipment lessors new business growing 20% but vehicle lessors remaining flat. While business may not be ‘normal, the industry has survived the financial crisis – albeit with fewer participants – and is poised for renewed growth.

Private and Public Machinery & Equipment Investment by Province
  Millions of Dollars % Growth
  2010F 2009 2010F 2009
Canada 100,699 97,933 2.8% -14.1%
Atlantic 5,832 5,392 8.2% -8.1%
Quebec 19,403 18,573 4.5% -7.8%
Ontario 38,885 37,528 3.6% -11.9%
Manitoba/Saskatchewan 7,040 6,558 7.3% -11.2%
Alberta 18,737 18,918 -1.0% -23.1%
British Columbia 10,335 10,474 -1.3% -18.6%

Source: Statistics Canada, Private and Public Investment Intentions

In 2009, 1,460,581 new passenger and light vehicles were sold in Canada: 87.5% were sold at retail and 12.5% were sold to fleet lessors. Of the 1,278,685 new light vehicles sold at retail only 7% were leased by consumer customers (compared to 42.4% in 2007). The 181,896 vehicles sold to fleet lessors in 2009 were 100% leased on to business customers.4

Leasing activity by equipment type

The table below highlights the distribution of assets by equipment type for the equipment lessors.

Distribution of Reported Equipment Assets by Type
(excludes independent & manufacturer vehicle lessors)
Equipment Type: 2008 2007
Total Finance Assets ($millions) 19,478 18,658
% change 4.4%  
Share of Finance Assets:    
Automotive Total 27% 29%
Trucks 14% 15%
Passenger 6% 7%
Trailers 5% 5%
Buses 2% 1%
Construction 18% 18%
Hotels, Restaurants, Apartments 9% 8%
Aircraft & Related 8% 7%
Manufacturing & Processing 8% 9%
Office Equipment 6% 5%
Mining & Petroleum 4% 4%
Materials Handling 3% 2%
Computers (hardware & software) 3% 2%
Medical, Health Services 2% 2%
Forestry 2% 3%
Store Furniture, Fixtures, Equipment 2% 2%
Agricultural 1% 1%
Railway Rolling Stock 1% 1%
Telecommunications 1% 0%
Water Vessels 0% 0%
Office Furniture, Fixtures 0% 0%
Other 5% 6%

Source: The Centre for Spatial Economics. Note: Total finance assets include all owned and managed loans and leases held by the reporting companies.

Three Decades of Federal Policy:

An efficient and sound financial system assuring a diversity of choice

Federal policy over the last three decades has actively sought to expand and diversify the number of financial service providers in the Canadian marketplace. This policy has been based on the view that users of financial services, both individuals and businesses, stand to benefit most if the financial services marketplace:

  • assures an expanding diversity of choice of providers;
  • increases the pool of credit and capital;
  • improves access to credit and capital;
  • ensures access to innovative services and products; and,
  • increases available specialized technical expertise.

By ensuring that a wide diversity of financial providers exists to offer Canadian consumers and businesses a range of financing solutions, the asset-based financing, vehicle and equipment industry plays an important role in Canadas financing sector. It has been active in Canada since the 1960s. The fundamental business model is proven effective and in demand by both business and consumer customers.

Impact of the current credit crisis

With the current crisis in the credit markets, if liquidity is not restored, many of those financial service providers will disappear from the Canadian marketplace. Once gone, their financing products, services and expertise cannot be easily replaced. By way of example, according to a post-budget presentation prepared by the Department of Finance, $1.125 Trillion of business credit was outstanding in 2007:

Non-equity Financial Markets $458 Billion (41%)
Equity $306 Billion (27%)
Chartered Banks $271 Billion (24%)
Other $ 90 Billion ( 8%)

It is the Non-equity Financial Markets (where most CFLA members can be found) that have been the most severely impacted in the current liquidity crisis. All reports suggest that the banks have increased available credit but it is not possible to expect them to fill the very substantial vacuum left by Non-equity Financial Markets. Canadian consumers and businesses will be the losers because there will be fewer financial providers and fewer financial product alternatives available.

Following extensive lobbying efforts by the CFLA, the Canadian Secured Credit Facility (CSCF) was created in 2009 by the Government of Canada to purchase up to $12 billion of asset-backed securities (ABS) backed by loans and leases on vehicles and equipment. Its objectives were (i) to stimulate economic activity by helping businesses and consumers access financing for these products and (ii) to rebuild confidence in the Canadian ABS market.

The Business Development Bank of Canada (BDC) was assigned responsibility for establishing and managing the CSCF on behalf of the federal government. The program was criticized for primarily serving large companies with smaller leasing companies unable to benefit directly from the program. The program was terminated on March 31, 2010 with about $3.4 billion of the $12 billion of available funds utilized.

Although the CSCF was not widely accessed, it did contribute to establishing a pricing benchmark and thus to the stability of the Canadian ABS market during a challenging period. To address concerns advanced by CFLA over access to funding for smaller finance companies, the 2010 federal budget established the Vehicle and Equipment Finance Partnership (VEFP) program to expand financing options for small- and medium-sized finance and leasing companies. The VEFP is again administered by the BDC and is part of the Business Credit Availability Program (BCAP). Its initial allocation of $500 million is to be disbursed and administered in partnership with experienced lenders and investors in the private market for asset-backed financing.

To date, no assets have been purchased under the VEFP.

Asset-Based Financing, Productivity and Economic Growth in Canada

Asset-based financing, investment and economic growth in Canada5, a 2004 groundbreaking study prepared by The Centre for Spatial Economics, a respected, independent group of economists who are also retained by the federal Department of Finance, has found that:

“the rise in asset-based financing from 1992 to 2002 improved living standards in Canada by 2.3% (or about 8% of the 26.8% increase in Canadas living standards over that period).6

This study was positively peer-reviewed by Jack Mintz, then Professor of Taxation at the Rotman School of Management at the University of Toronto, and then CEO of the C.D. Howe Institute, and by Jim Stanford, Economist in the Research Department of the Canadian Auto Workers(CAW).

“This unique study overwhelmingly demonstrates the importance of asset-based financing to Canadas economic growth by supporting greater financial product choice and innovation. The industry contributes a disproportionate share to higher living standards that has been experienced during the decade, 1992-2002.”

Dr. Jack Mintz

Key findings

Investment drives productivity – economic research states that machinery and equipment investment directly contributes to labour productivity gains by increasing the amount of productive capital available for workers to use. Research also suggests that machinery and equipment investment is either directly the agent of technological change, or else an important facilitator in the diffusion of new technology.

Productivity raises living standards – in order to boost living standards either labour productivity needs to rise, or people need to work harder, or more people need to become employed, or more people of working age need to enter society relative to total population. Canadian living standard gains rely primarily on labour productivity growth.

Financial system development promotes investment – research conducted by the OECD supports the notion that financial system development promotes capital spending and that countries with weaker financial systems are unable to effectively channel domestic or global savings towards new investment opportunities.

Asset-based financing adds significantly to the financial system – the analysis in this report finds that asset-based financing was responsible for a 2.3% increase in Canadas living standards over the decade 1992 to 2002 (or about 8% of the total increase in Canadas living standards over that decade). Asset-based financing makes a significant positive contribution to increasing national living standards.

1 Report of the Task Force on the Future of the Canadian Financial Services Sector, September 1998, at page 43
2 Private and Public Investment in Canada, Intentions 2010, Statistics Canada, March 2010
3 Readers are cautioned that the true market for leasing is larger than these estimates because marine, rail and other equipment that is financed offshore has not been included. These figures do, however, include an estimate from Ascends CASE database of the value of fixed wing aircraft assets in Canada financed by foreign leasing companies.
4 The Canadian Light Vehicle Retail Finance Sector by Lending Channel, Desrosiers Automotive Consultants Inc., January 2010
5 Asset-based financing, investment and economic growth, The Centre for Spatial Economics, Milton, Ontario, December 15, 2004 http://www.cfla-acfl.ca/files/public/CFLA-Final_Economic_Report-PDF-Dec04.pdf
6 Asset-based financing, investment and economic growth (see footnote #6), at p. 62

Further Reference Documents

A more detailed analysis of industry data is contained in The 2010 Annual Survey of Asset-based Financing and Leasing in Canada, prepared for CFLA by The Centre for Spatial Economics, Milton, Ontario.

  • CFLA Annual Reports 2003-2010. Please go to: http://www.cfla-acfl.ca/members/annualreport.asp
  • CFLA Backgrounder on the Asset-based financing, equipment & vehicle leasing industry in Canada. Please go to: http://www.cfla-acfl.ca/files/public/CFLA_Backgrounder-Jan06.pdf
  • Asset-based financing, investment and economic growth, The Centre for Spatial Economics, Milton, Ontario, December 15, 2004. Please go to: http://www.cfla-acfl.ca/files/public/CFLA-Final_Economic_Report-PDF-Dec04.pdf

Last updated: October 2010

Asset-Based Financing Raises Canadian Living Standards

“Asset-based financing, investment and economic growth in Canada”, a recently published groundbreaking study prepared by The Centre for Spatial Economics, a respected, independent group of economists who are also retained by the federal Department of Finance, has found that:

“the rise in asset-based financing from 1992 to 2002 improved living standards in Canada by 2.3% (or about 8% of the 26.8% increase in Canadas living standards over that period)”

Key findings

Investment drives productivity – economic research states that machinery and equipment investment directly contributes to labour productivity gains by increasing the amount of productive capital available for workers to use. Research also suggests that machinery and equipment investment is either directly the agent of technological change, or else an important facilitator in the diffusion of new technology.

Productivity raises living standards – in order to boost living standards either labour productivity needs to rise, or people need to work harder, or more people need to become employed, or more people of working age need to enter society relative to total population. Canadian living standard gains rely primarily on labour productivity growth.

Financial system development promotes investment – research conducted by the OECD supports the notion that financial system development promotes capital spending and that countries with weaker financial systems are unable to effectively channel domestic or global savings towards new investment opportunities.

Asset-based financing adds significantly to the financial system – the analysis in this report finds that asset-based financing was responsible for a 2.3% increase in Canadas living standards over the decade 1992 to 2002 (or about 8% of the total increase in Canada’s living standards over that decade). Asset-based financing makes a significant positive contribution to increasing national living standards.

Policy Implications

Financial innovation – financial choice and innovation need to be encouraged in order to maintain a healthy and growing financial system. A dynamic financial system is one of the key factors in promoting investment, raising productivity and, therefore, improving our standard of living.

Tax policy – government policy in Canada does not encourage investment in machinery and equipment to the degree that the economic research suggests would be optimal. Therefore, a strategy of improving the economic climate for machinery and equipment investment should pay significant dividends in terms of stronger economic growth, higher productivity and living standards for Canadians for many years to come. This could be done in a horizontally equitable manner by encouraging all forms of investment spending because of the potential complementary nature of machinery and non-machinery investment in boosting economic growth and productivity.

These important policy considerations underlie our advocacy efforts with all levels of government and other stakeholders.

Association Profile

The Canadian Finance & Leasing Association (CFLA) is the only organization advocating the interests of the asset-based financing, vehicle and equipment leasing industry in Canada. Through CFLA, members are able to influence the shape of the industry’s future within the competitive financial services sector.

Established in September 1993 through the merger of the Canadian Automotive Leasing Association (CALA) and the Equipment Lessors Association of Canada (ELAC), the Association has grown from an initial membership of 61 companies to almost 200 today.

Members range from large multinationals to national and smaller regional domestic companies, crossing the financial services spectrum from manufacturers' finance companies and independent leasing companies, to banks, insurance companies, and suppliers to the industry.

The Association has four key responsibilities:

  • Advocacy – to key publics including governments, media, other associations in the financial services sector, and the general public.
  • Education – providing member employees with sessions on the basics of asset-based financing and leasing as well as seminars and workshops on specific industry topics.
  • Information – providing timely information to members to alert them of changes that may directly impact their businesses.
  • Networking – providing a forum and creating opportunities for industry leaders and their employees to meet, exchange information on issues of common interest, and learn best practices from each other.

CFLA’s annual national conference (held in the fall) is the leading event of the CFLA calendar bringing together approximately 300 industry leaders.

The annual Toronto golf tournament is held in May.

CFLA publishes online an annual survey of the asset-based financing, equipment and vehicle leasing business activity carried on by reporting members.

CFLA’s website has become the industry’s electronic information resource centre with a growing archive of information focused on the business of asset-based financing and leasing in Canada. The site provides a range of “member-only” value added services. Changes in government policy, new legislation and regulation, the latest court decisions, legal, accounting and tax commentaries by CFLA professional members are regularly e-mailed on a timely basis to members located across the country. The delivery of timely information to members is further augmented by the regular CFLA eBulletin, an e-mail newsletter.

The Association also offers an education program called Canadian Lease Education On-demand or “CLEO” which consists of eleven pre-taped webinars designed to enhance one’s general understanding of the asset-based financing, equipment and vehicle leasing business in Canada.

Membership Profile

As at June 30, 2011, CFLA had 198 members: 63% were Regular Members (that is, members active in the business of asset-based financing and leasing), the Associate Members (that is, members who supply services to the Regular Members such as law and accounting firms, funders, software developers, etc.) made up 32% of the membership. The remaining 5% of the members were non-residents.

Governance

CFLA is a federal non-profit corporation with its head office located in Toronto, Ontario.

There are three classes of membership: Regular Members, Associate Members and Non-resident Members. Regular Members are enterprises in the active business of asset-based financing and leasing. Associate Members are enterprises that provide services to the industry (such as law and accounting firms, funders, software developers, auction houses, etc.) Non-resident Members are interested in the asset-based financing and leasing industry in Canada but are not resident in this country.

A Board of Directors nominated from the Association membership and elected for two-year terms by the Members determines CFLA policies. The Board is composed of business leaders representing a cross-section of the industry in terms of market size, area of business and geographical location.

There is an Executive Committee composed of the Chairman, the Vice-Chairmen, the Secretary-Treasurer with one or more members at large plus the President. The Executive Committee is appointed by the Board.

Committees

Much of the active work of the Association is conducted by seven committees

  • Accounting
  • Automotive Finance Working Group
  • Education & Program
  • Fleet
  • Legal
  • Small Ticket Funders, and
  • Taxation

In their relevant area of expertise, the committees serve as:

  • CFLA’s radar – being proactive – bringing forward intelligence, issues, challenges and opportunities affecting the industry;
  • CFLA’s sounding board – to react to issues and advise on policy options;
  • an exchange for information, experience and expertise;
  • a channel to disseminate information relevant to the industry.

Association Staff

A full-time professional staff of four people manages the Association:

  • David Powell, President & Chief Executive Officer
  • Lalita Sirnaik, Manager, Finance & Administration
  • Matthew Poirier, Director, Policy
  • Charlene Forde, Director, Events & Member Services
  • Chishuvo Mandivenga, Administrative Secretary

Last updated: April 2012