Canadian Equipment Finance magazine NovDec 2014

Nov/Dec 2014 • volume 2 • issue 6 | www.canadianequipmentfinance.com

THE LEGAL REPORT:

The ‘disconnection’ notice; The ‘indoor management rule’; legalities within the finance industry Cleared for Takeoff: The rise of online lease financing Business: Why do dogs bark but fish don’t?

Observations: Should it stay or should it go?

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EQUIPMENT FINANCING SPECIALISTS Jean-Pascal Gagnon Account Manager Thierry Martin Senior Manager

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François Houde Senior Manager Thierry Langevin Vice-President

Sébastien Lemay Senior Manager Louis Dupuis Senior Manager

contents November/December 2014 Volume 2 Number 6 Publisher and Editor-in-Chief Steve Lloyd steve@canadianequipmentfinance.com Editor Karen Treml karen@canadianequipmentfinance.com Creative Direction / Production Jennifer O’Neill jennifer@canadianequipmentfinance.com

ELFA REPORT: What is the current state of technology in the equipment finance industry. Find out in the ELFA ‘Business Technology Performance Index’. And in the survey of economic activity, equipment finance companies showed an increase in overall business volume. »4

FEATURES

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THE LEGAL REPORT Disconnection Notice Some legal aspects of remote disabling technologies »11

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Relying on the Indoor Management Rule and Grant of Security Interest: A Common Problem A case study involving Accra Wood Productions Ltd. »14

Cleared for Takeoff The rise of online lease financing in Canada »20

State of the Equipment Finance Industry Report »23

EVENTS

NEWS »7 Your Business Why do dogs bark but fish don’t?

Removing the [ ] from your [business] »16

Where to go. What to see. »24

Observations Should it stay or should it go?

The challenges of derelict equipment »26

Ontario Interactive Digital Media Tax Credit

canadianequipmentfinance.com | november/december 2014 | CANADIAN EQUIPMENT FINANCE

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EFLA Report

‘ELFA Business Technology Performance Index’ examines state of technology What is the current state of technology in the equipment finance industry? The newly released ‘Business Technology Performance Index’ examines that question. Conducted for ELFA by Capgemini, the report provides insight into the technology trends and forwardlooking initiatives that equipment finance companies are using to drive their firms into new markets and opportunities.

The equipment finance industry is shifting from traditional to digital channels, including online, mobile and more recently social media. In order to create and deliver the anticipated customer experience, operational efficiency and new business model benefits, companies will need to develop more innovative and engaging service offerings and fully leverage the rapidly evolving digital technologies.

The report, based on industry research and a survey of industry members, is available on the ELFA website at http://www.elfaonline. org/Research/?fa=Studies#BTPI.

Survey of Economic Activity: Monthly Leasing and Finance Index The Equipment Leasing and Finance Association’s (ELFA) ‘Monthly Leasing and Finance Index (MLFI-25)’, which reports economic activity from 25 companies representing a cross section of the $903 billion equipment finance sector, showed their overall new business volume for October was $8.3 billion, up nine per cent from new business volume in October 2013. Month over month, new business volume was down 12 per cent from September. Year to date, cumulative new business volume increased eight per cent compared to 2013.

Receivables over 30 days increased from the previous month to 1.2 per cent, and were up from 0.9 per cent in the same period in 2013. Charge-offs were unchanged for the seventh consecutive month at an all-time low of 0.2 per cent.

Credit approvals totaled 78.3 per cent in October, a decrease from 79.7 per cent the previous month. Total headcount for 4

equipment finance companies was up 0.7 per cent year over year.

Separately, the Equipment Leasing & Finance Foundation’s ‘Monthly Confidence Index (MCI-EFI)’ for November is 64.2, an increase from the October index of 60.4 and the highest level since May. ELFA President and CEO William G. Sutton, CAE, says: “ELFA members report strong growth in new business volume, albeit tempered by continued margin compression in many sectors. The U.S. economy continues to expand at a modest rate, providing a welcome stimulus for investment in business equipment. Portfolios are performing relatively well, although delinquencies are showing some slight volatility. Most economic indicators – lower fuel prices, reduced unemployment and a robust equity and bond market – all point to a strong fourth quarter,

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

absent some unforeseen development.”

Michael Doyle, President, BTMU Capital Leasing and Finance, Inc., says, “The solid growth in October year-onyear new business volume is evidence of a fairly robust capital expenditure environment. We see this trend continuing into a strong fourth quarter, with the possible exception of those markets related directly to petroleum exploration and development. These markets will continue to be negatively affected if low oil prices persist.

Stronger sectors include those involving transportation assets and information technology equipment and software.

Generally, we are seeing consistent credit discipline, but this has not yet translated into a more stable pricing environment.

We expect that margin compression will continue to be an issue in the fourth quarter as lessors look to book volume to meet their 2014 budgets.”

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EFLA Report

About the ‘Equipment Leasing and Finance Industry ELFA MLFI-25 Confidence Index’ sees six-month high The MLFI-25 is the only index that reflects capex, or the volume of commercial equipment financed in the U.S. The MLFI-25 is released globally at 8 a.m. Eastern time from Washington, D.C., each month on the day before the U.S. Department of Commerce releases the durable goods report. The MLFI-25 is a financial indicator that complements the durable goods report and other economic indexes, including the Institute for Supply Management Index, which reports economic activity in the manufacturing sector. Together with the MLFI-25 these reports provide a complete view of the status of productive assets in the U.S. economy: equipment produced, acquired and financed.

About the Foundation The Equipment Leasing & Finance Foundation is a 501c3 non-profit organization that provides vision for the equipment leasing and finance industry through future-focused information and research. Funded through charitable individual and corporate donations, the Foundation is the only organization dedicated to future-oriented, in-depth, independent research for the leasing industry. In 2014, the Foundation celebrates its 25th anniversary. Visit the Foundation online at http:// www.LeaseFoundation.org 6

The Equipment Leasing & Finance Foundation released its ‘November 2014 Monthly Confidence Index for the Equipment Finance Industry (MCI-EFI)’. Designed to collect leadership data, the index reports a qualitative assessment of both the prevailing business conditions and expectations for the future as reported by key executives from the $903 billion equipment finance sector. Overall, confidence in the equipment finance market is 64.2, an increase from the October index of 60.4 and the highest level since May. When asked about the outlook for the future, MCI-EFI survey respondent Valerie Hayes Jester, president, Brandywine Capital Associates, Inc., says, “The mid-term elections are now over and consumer confidence seems to be improving as gas prices and unemployment statistics continue to decrease. We have experienced an increase in demand for capital equipment purchases and, more importantly, financing for those orders. Another important note is that the equipment being requisitioned appears to be associated with business expansion and not just replacement of older assets.”

November 2014 Survey Results: The overall MCI-EFI is 64.2, an increase from the October index of 60.4. no change in headcount over the next four ◉◉ When asked to assess their business months, unchanged from last month. 6.1 conditions over the next four months, 27.3 per cent expect fewer employees, down from per cent of executives responding said they 11.4 per cent in October. believe business conditions will improve ◉◉ Three per cent of the leadership evaluate over the next four months, up from 23 per the current U.S. economy as “excellent,” cent in October. 69.7 per cent of respondents unchanged from last month. 97 per cent believe business conditions will remain of the leadership evaluate the current U.S. the same over the next four months, down economy as “fair,” up from 94.3 per cent in from 74 per cent in October. Three per cent October. None rate it as “poor,” down from believe business conditions will worsen, three per cent the previous month. unchanged from the previous month. ◉◉ 42.4 per cent of the survey respondents ◉◉ 30.3 per cent of survey respondents believe believe that U.S. economic conditions will demand for leases and loans to fund capital get “better” over the next six months, an expenditures (capex) will increase over the increase from 28.6 per cent who believed next four months, up from 25.7 per cent in so in October. 54.6 per cent of survey October. 66.7 per cent believe demand will respondents indicate they believe the U.S. “remain the same” during the same foureconomy will “stay the same” over the next month time period, down from 71.4 per cent six months, down from 68.6 per cent in the previous month. Three per cent believe October. Three per cent believe economic demand will decline, unchanged from conditions in the U.S. will worsen over October. the next six months, unchanged from last ◉◉ 21.2 per cent of executives expect more month. access to capital to fund equipment ◉◉ In November, 42.4 per cent of respondents acquisitions over the next four months, up indicate they believe their company will from 11.4 per cent in October. 78.8 per cent increase spending on business development of survey respondents indicate they expect activities during the next six months, an the “same” access to capital to fund business, increase from 34.3 per cent in October. 54.6 down from 88.6 per cent in October. None per cent believe there will be “no change” in expect “less” access to capital, unchanged business development spending, a decrease from the previous month. from 63 per cent last month. Three per cent ◉◉ When asked, 45.4 per cent of the executives believe there will be a decrease in spending, reported they expect to hire more employees unchanged from last month. over the next four months, an increase from 40 per cent in October. 48.5 per cent expect

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

News

Hospitals to increase IT investments to meet operational inefficiencies IDC Health Insights presented its 2015 healthcare predictions, based on an ‘IDC FutureScape Report’. The report provided insights and perspectives on long-term industry trends along with new themes that may be on the horizon.

The predictions include: ◉◉ With healthcare costs rising, operational inefficiency will become critical at 25 per cent of hospitals, resulting in the development of a data-driven digital hospital strategy requiring budget in 2016. ◉◉ By 2020, 80 per cent of healthcare data will pass through the cloud at some point in its lifetime, as providers seek to leverage cloud-based technologies and infrastructure for data collection, aggregation, analytics, and decision-making. ◉◉ As a result of an increased focus on improving the consumer experience, 65 per cent of consumer transactions with healthcare organizations will be mobile by 2018, thus requiring healthcare organizations to develop omni-channel strategies to provide a consistent experience across the Web, mobile, and telephonic channels. ◉◉ To control spiraling healthcare costs related to managing patients with chronic conditions, 70 per cent of healthcare

organizations worldwide will invest in consumer-facing mobile applications, wearables, remote health monitoring, and virtual care by 2018, which will create more demand for big data and analytics capability to support population health management initiatives. ◉◉ Building on continuing technology innovation and the increasing use of knowledge-based workflows and actionable analytics, more than 50 per cent of big data issues will be reduced to routine operational IT by 2018, reducing the need for specialized IT resources to support big data.

“These decision imperatives provide a road map for healthcare organizations to think about IT investments that will need to be made and the impact they will have on an organization, all of which can be used to support the planning and budgeting process,” says Scott Lundstrom, group vice-president and general manager of IDC Health Insights. “Common themes emerging from the FutureScape include the focus on consumer experience and engagement, the use of mobile and internet enabled devices, and of course, the 3rd Platform technologies.”

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News

Small business lending reaches record high The October Thomson Reuters/PayNet ‘Small Business Lending Index’ (SBLI) increased 12 per cent compared to October 2013. The SBLI increased four per cent from 127.1 in September 2014 to 131.8 in October 2014, reflecting signs of strength in the economy. This is the first time the SBLI has exceeded the pre-recession peak, though it did so just barely compared to the previous high of 131.7 in January 2007.

“This positive report indicates small business confidence has returned. They are investing at a rate on par with before the recession,” says William Phelan, president of PayNet. “Their financial health remains strong, so much so that the increased investment is creating profitable growth as no signs of material delinquency appears.”

Expansion has been accompanied by low and or falling delinquencies.

The ‘31-90 days past due’ decreased from 1.26 per cent in September 2014 to 1.25 per cent in October 2014, which is only 10 basis points above the all-time low of 1.15 per cent recorded in October 2013. Notably, the Transportation and Retail segments are both at all-time lows of 0.79 per cent and 1.13 per cent, respectively.

The ‘91-180 days past due’ remained flat at 0.31 per cent from September to October. Compared to one year ago, severe delinquency is up two basis points from 0.29 per cent.

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CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

Manufacturing shifts into high gear; spurs equipment investment

The manufacturing sector in the U.S. has reached the highest rate of growth in more than four years, according to ‘Shifting Into High Gear’, an industry report released by Brown Gibbons Lang & Company (BGL).

The BGL Industrials Insider, available online, highlights the expansion in the U.S. manufacturing sector for the 17th consecutive month. In fact, virtually all manufacturing industries expanded in the month of October, with strong demand and growth, and with new orders cited.

An expanding U.S. manufacturing sector is spurring investment in capital equipment and benefiting suppliers of industrial components. Key drivers of future equipment demand will be the replenishment of aging fleets, a recovering non-residential construction market, and increased investment in civil and energy infrastructure.

Private equity is betting on the continued revival of the U.S. manufacturing economy, evidenced by increased

NEWS

investment in industrial companies, among them manufacturers of custom precision gears and engineered drive solutions where M&A activity is on the rise.

BGL publishes several Insider reports annually.

The middle market investment banking firm based in Cleveland, OH, and Chicago, IL, releases reports on a variety of industries including automotive; consumer products; building products and construction materials; energy and environmental services; healthcare and life sciences; industrials; metals; and plastics and packaging.

MAPI forecasts 2015 CAPEX growth in equipment sectors Strong growth in jobs plus replacement demand for equipment from businesses will provide a stable base for overall economic growth, says the quarterly economic forecast by the MAPI Foundations, the research affiliate of the Manufacturers Alliance for Productivity and Innovation.

The report predicts that inflation-adjusted gross domestic product will expand 2.8 per cent in 2015 and three per cent in 2016. Both are declines from the August report – of three per cent and 3.3 per cent, respectively. Manufacturing production is expected to outpace GDP, with anticipated growth of 3.5 per cent in 2015 (a decrease from four per cent in the previous forecast) and 3.9 per cent in 2016 (an increase from 3.6 per cent in the August report).

The November 2014 report forecasts a five-year horizon in which GDP is expected to average 2.8 per cent and manufacturing production to average 3.26 per cent growth. “We will have full employment in 18 months and manufacturing is already there,” says MAPI Foundation Chief Economist Daniel J. Meckstroth.

“With the unemployment rate continuing to fall, the

pain and suffering from the recession is dissipating.

Why are businesses spending? Because consumers are spending. Also, the drop in energy prices is essentially a tax cut for us. Lower prices are a positive development.”

Production in non-high-tech manufacturing is expected to increase 3.8 per cent in 2015 and 3.7 per cent in 2016. High-tech manufacturing production, which accounts for approximately 5 per cent of all manufacturing, is anticipated to grow 8.2 per cent in 2015 and 10.0 per cent in 2016.

The forecast for inflation-adjusted investment in equipment is for growth of 6.9 per cent in 2015 and 7.3 per cent in 2016. Capital equipment spending in high-tech sectors will also rise. Inflation-adjusted expenditures for information processing equipment are anticipated to increase by double digits in each of the next two years – 12.1 per cent in 2015 and 12.3 per cent in 2016. The MAPI Foundation expects industrial equipment expenditures to advance 7.6 per cent in 2015 and 3.6 per cent in 2016. Conversely, the outlook for spending on transportation equipment is for decreases of 0.8 per cent in 2015 and 0.4 per cent in 2016.

canadianequipmentfinance.com | november/december 2014 | CANADIAN EQUIPMENT FINANCE

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Legal report

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CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

Legal Report

Disconnection Notice Some Legal Aspects of Remote Disabling Technologies

By Eric Grossman, CPA CGA

hey’re my machines and if you don’t pay, I’ll shut you down!”

A client recently made this angry exclamation after I mentioned my legal concerns surrounding the fact that he remotely disabled equipment used by his customers on two occasions.

This client manufactures digitally controlled equipment that requires a time-sensitive activation code. If he doesn’t renew a machine’s activation code, the machine stops and cannot be restarted until he provides a new code.

His company regularly communicates with all installed units so that faults or failures can be detected and addressed immediately, consumables can be shipped automatically when they run low, and preventive maintenance schedules can be based on actual hours of use.

Not all equipment is designed to be so easily disabled, but there are a growing number of equipment manufacturers, lenders, owners, and users who install third-party technologies that can be used remotely to disable or to locate, whether through GPS, cellular, or web-based networks.

The client told me about disabling his customers’ machines because he was offering to give me that same enforcement tool when I began financing his customers’ purchases. After shouting, he mumbled that one customer’s lawyer had forced him to restart a machine before the delinquent payment was made. He had no idea what his error might have been.

In fact, he was lucky that the customer

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didn’t sue for financial losses because of his actions because he likely would have been found liable.

In order to avoid problems when remotely disabling equipment, let’s review the legal structures around this practice.

Disablement means taking possession At least in Ontario, at present the ‘Personal Property Security Act’ (the ‘PPSA’) 62(b) states that upon default under a security agreement, if a secured party renders equipment unusable without removing it from the debtor’s premises, the secured party is deemed to have taken possession of the equipment. So when my client disabled his customers’ units, he was considered under the law to have taken possession of or seized the equipment, even though he never attended their premises.

However, for the disablement to be deemed a legal seizure, the PPSA requires that “the security interest has been perfected by registration”. If there is no valid registration, this would not be considered a legal seizure. Since my client did not register his interest in the equipment he disabled, his actions left him liable for any damage caused. He could, in fact, be guilty of conversion, the improper taking of property from another without due authority, for which a civil action could be brought.

After taking possession, additional rules come into play to govern how the creditor must act, so it’s best to be

canadianequipmentfinance.com | november/december 2014 | CANADIAN EQUIPMENT FINANCE

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Legal Report cautious when considering any decision to disable equipment.

Notice of taking possession While it’s true that the Personal Property Security Act in most provinces allows a secured creditor to take possession of collateral by any method permitted by law, it is silent about whether any notice of the impending seizure is required to be given. However, Canada’s ‘Bankruptcy and Insolvency Act’ and the common law (court decisions) do set out some notice requirements. (a) ‘Bankruptcy and Insolvency Act’ (‘BIA’)

Under the BIA 244, a secured party who intends to enforce a security must provide at least ten days’ notice, if there is intent to take possession of “all or substantially all of (a) the inventory, (b) the accounts receivable, or (c) the other property of an insolvent person that was required for, or is used in relation to, a business carried on by the insolvent person.” In other words, if the debtor relies on the equipment to carry on its business and is understood to be insolvent (unable to pay its debts as they come due), ten days’ written notice is required. The notice period can be shortened if the debtor consents, but the full notice must still be given first.

Even if the lender’s security documents contain an acknowledgement by the debtor that the equipment is not essential to their business, when later there is a default, this acknowledgement won’t help the lender if the equipment proves in fact to be essential. For example, if my one of my client’s customers had to close its doors because he disabled their equipment, it would be difficult to argue that the equipment was not essential, no matter what the agreements said.

My client would therefore have been prudent to send the required notice at least ten days before the old activation code expired, if there were any chance that the equipment could constitute “all or substantially all” of the equipment his customer relied on at that moment. (b) Common law

The common law, developed over time by judges through their decisions, has 12

required, at least since the 1982 Supreme Court of Canada decision in Lister v.

Dunlop, that some reasonable notice of intention to take possession must be provided in writing, in order to allow the debtor some reasonable time in which to act to cure the default. The failure to provide reasonable notice and the subsequent seizure of assets may expose a creditor and its agents to damages for breach of contract, conversion, or trespass.

Deciding what is reasonable notice is not simple. Some of the factors to be considered are the amount of the loan, the risk of loss to the creditor, the age of the relationship with the debtor, the character and reputation of the debtor, the potential ability to raise the money in a short time, and the circumstances surrounding the demand for payment. The larger the loan, the longer is the reasonable notice period, since it would be more difficult and take longer to raise more money. If the risk of loss to the creditor is high, such as in the case of high-value units left unattended in a public place, then a shorter notice period would be reasonable. A longer relationship between the parties would suggest a longer notice period, as long as there have not been repeated defaults.

Debtors of good character are entitled to a longer notice period, while those demonstrating dishonest conduct are due only the minimum period. The debtor’s ability to raise the necessary money will depend on their assets, inventory, current market conditions, and health of their operations, so an impairment in these elements would favour a shorter notice period. And the narrative that brought the parties to this point, including their discussions before and around the default, will affect what is reasonable notice.

It is important to remember that even a dishonest debtor who appears to us to be insolvent may have funds available through related individuals or corporations. If a creditor demands payment and gives the debtor no time or a very short time to pay, relying on the debtor’s inability to raise funds, the creditor risks being unable later to prove that inability.

Perfection of security

by PPSA registration Since the PPSA, in Ontario at least,

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

requires that a lender’s security be perfected in order to permit remote disablement of equipment, we had better be clear what it means to achieve perfection. For our purpose, the main elements required are (1) a security agreement signed by the debtor that contains a full description of the equipment, and (2) registration of the security in the PPSA registry.

So my client, if he ever wished to disable customer equipment in the future, should have security agreements signed by those customers to whom he will be extending credit. Then he must register these agreements and in the registration specify the equipment by serial number. And he must always ensure that he has the full and correct spelling of the debtor’s name.

The security agreement itself should include, among many other things, details about the technology that will be used for remote disablement, including, for example, whether there will be periodic code updates required for the equipment to continue to operate.

The unpaid debt in one of my client’s cases arose from monthly maintenance and service fees that had fallen into arrears. One strategy I use now when I finance this client’s customers is to restructure the client’s old required monthly service fees into a new, singlefee service contract package that must be purchased up front. We then include this service contract fee as part of the financing.

Other considerations The technologies available for remote disablement are as varied as the kinds of equipment they disable. Those who employ these technologies must consider, for example, their legality in the various jurisdictions the equipment comes to rest, the impact their use may have on insurance coverage, and the effect a disabled machine may have on its surroundings, on or beyond the debtor’s property. Security agreements must also be customized for each technology.

Eric Grossman CPA CGA is president of Aquilian Financial.

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The Legal Report

Relying on the Indoor Management Rule and Grant of Security Interest – A Common Problem A case study involving Accra Wood Productions Ltd.

By Keri Wallace

hen dealing with commercial contracts, corporate lawyers often advise their clients to obtain evidence that the contract was properly executed and authorized to affirm the contracts enforceability. Typically, a copy of board resolutions is provided and a legal opinion with respect to due authorization and enforceability is delivered. These checks and balances can be costly, and some transactions cannot support the additional costs. For these types of transactions companies can rely on the indoor management rule, a principle that third parties transacting with companies may assume that internal company policies are complied with. In Canada, this principle is codified federally in Section 18 of the ‘Canada Business Corporations Act’ as well as various provincial equivalents of that act.

Another issue that arises in the ordinary course for many equipment financers is the ability to take an interest in the goods of the debtor as security for the payment and performance of their obligations.

Again, though the recommended approach is to obtain a separate agreement granting security in the desired property, along

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CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

with a copy of directors resolutions authorizing the grant of a security interest, these additional steps may not be worth the effort on smaller deals.

The indoor management rule and the granting of a security interest within a purchase order were both affirmed by the British Columbia Supreme Court in Accra Wood Productions Ltd. (Bankruptcy of), 2014 BCSC 1259 (“Accra”). At issue was whether a supplier of goods on credit could rely on the assumption that the office manager of the debtor had the authority to enter into a secured credit agreement and whether security language embedded in a purchase order properly granted the supplier a security interest in the debtor’s property. The trustee in bankruptcy for the debtor disallowed the supplier’s claim on the basis that (i) the office manager who signed the credit application did not have the authority to enter into such agreement, and (ii) the security interest language in the document was inconspicuously included.

Assumption of authority On the indoor management rule, the court considered, among other things, that the credit agreement included language above the signature block stating “authorized

The Legal Report to execute this application on behalf of the customer” and found this to be a clear confirmation of authority. This is in line with commercial practice, especially for smaller contracts. Without the indoor management rule, a diligent person would request a copy of written resolutions of the board of directors authorizing the company to perform the obligations and stating a director or officer may sign on such agreement on behalf of the organization. Though large transactions may be able to justify such costs, a supplier of goods who ordinarily engages in business with a purchaser should be able to assume the representative they deal with has authority to bind the company. The indoor management rule therefore makes sense for the commercial contracts it protects, it produces an economic benefit by lowering the cost of diligence for smaller transactions. The cost of any diligence would likely be passed to the customer, driving up the cost of doing business. Accra reaffirms this, as the Court confirmed the supplier could rely on the indoor management rule.

A factor in Accra that supported the Court’s decision to allow the suppliers reliance on the indoor management rule was that the purchaser and the supplier were in an ongoing relationship and the authority of the office manager was not challenged until the insolvency of the purchaser. The purchaser behaved as though it was bound by the terms of the agreement and so the supplier was able to assume that the purchaser was bound by the terms of the agreement.

The principle is balanced by the concept that the party enforcing the obligations on the company may not rely on the indoor management rule where they knew or ought to have known the person signing on behalf of the company did not have authority. This avoids a situation where a clever person seeks out an innocent but ignorant employee of the debtor, so that the company will then be bound by the terms of the agreement without any negotiation.

Consistent with the contract Regarding the grant of security interest, based on the location and clarity of

the security language it was found that “a reasonable step was made to bring attention to the signing party the presence of a security-granting clause in the agreement.” The court stated that the supplier did not have a duty to bring the security clause to the attention of the person signing for Accra, relying on the general principal that a party signing an agreement is bound by its terms, absent fraud or misrepresentation. The court distinguished Accra from Tilden Rent-A-Car Co. v. Clendenning 1978 Canlii 1446 (ONCA) and Arndt v. The Ruskin Slo Pitch Association 2011 BCSC 1530, noting that in those cases the provisions in question were on the back of the document in fine print and were inconsistent with the overall contract, and as well, the counterparty was in a hurried or pressured state when signing.

As the contract in Accra was for an extension of credit, a grant of a security interest was consistent with the contract.

Again, though it is standard practice to

obtain a copy of authorizing resolutions where a grant of security interest in all present and after acquired property is provided, the court did not find that +-the absence of such resolutions invalidated the security.

The reasons of the Court affirm that the commercial practice of most suppliers on credit include these provisions in a contract. It should be noted that the fact that the terms were not an unusual size and the inclusion of a statement above where Accra signed the agreement contained the grant of a security interest were relevant to the court’s decision. Still, where feasible it is good practice to obtain a copy of authorizing resolutions to ensure the transaction has been approved and that the corresponding agreements have been duly authorized and executed.

Keri Wallace is an associate in the Financial Services Group. Her practice focuses on bankruptcy, corporate restructuring, banking and finance matters, representing lenders and borrowers in a variety of financing transactions including secured financing, corporate restructurings, equipment leasing, and asset-based lending.

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Please contact Jason Bonneville • jason@advantleasing.com 905-335-3301 ext 224 • www.advantleasing.com canadianequipmentfinance.com | november/december 2014 | CANADIAN EQUIPMENT FINANCE

15

Your Business

Why Do Dogs Bark But Fish Don’t Removing the [ ] from your [business]

By Angela Armstrong

“He who asks is a fool for five minutes, while he who does not ask remains a fool forever” ~ Chinese proverb

t is every parents’ joy – the moment their child first speaks.

Then, at the age of three, they begin to slowly confound their parents’ rational adult brains with questions.

Why is the sky blue? Why do dogs bark but fish don’t? Why is tomorrow tomorrow and not today?

I bet you’ve had employees that drove you to distraction with their questions in the same way your toddler used to.

Perhaps you even changed your route to the coffee room to bypass their office.

[C’mon, you know you have.]

Having to think about ‘stuff’ all the time consumes a lot of energy. We develop habits and go on autopilot because when we know something well, we can free our minds up from processing the mundane details of daily activity.

I

Oatmeal or granola?

President Obama eats the same thing for breakfast every day. Scientists have proven you can only make so many good decisions in a day and the ‘Leader 16

of the Free World’ can’t afford to waste decisions on such frivolities as ‘oatmeal or granola?’

However, there is risk in ‘conserving energy’. In business, who gets to decide which questions are mundane and which ones are worth exploring?

And there’s another compounding, problem – people are naturally biased to do what they’ve done before. It’s called the ‘sunk cost effect’. Behavioural scientists Hal R Arkes and Catherine Blumer posit that humans exhibit a mental bias to choose what they’re already invested in – even when given information that makes a new decision more attractive. Mental bias causes people to pragmatically filter out the subsequent information and resort to their ‘tried and true’ solution.

So what on earth happens to our naturally inquisitive species between the age of two and the time when we become one with the Borg? (my inner Trekkie just emerged – Captain Kirk was one of the great question askers of all time).

Amanda Lang, in her book “The Power of Why” believes that it’s partly rooted in our legacy education system. Two things she considers: 1. the industrial age rewarded ‘experts’, so we worked at conferring a tight bandwidth of knowledge – there was

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

‘right’ and ‘wrong’ information 2. children that conformed (i.e. got the ‘right’ answers on the tests) were rewarded This resulted in our curious little twoand three-year-olds becoming wise, allknowing 12-year-olds who conformed like crazy and lost that annoying habit of curiousity. The problem is that we are not in an industrial age any more. Our new information age needs people who can quickly adopt new perspectives, who are willing to seek new information, and who are willing to boldly go where no one has gone before.

(Sorry about that.)

True grit I am an innovation junkie. And innovation is positively correlated with something else that I stumbled on in a ‘Ted Talk’ by Angela Duckworth – resilience. When you think about it, there’s a natural alignment between resilience and innovation.

The study (you can take the test at https://sasupenn.qualtrics.com/ SE/?SID=SV_06f6QSOS2pZW9qR) shows a person’s ability to recover from failure and persist toward a goal – what Ms. Duckworth calls ‘grit’. The more grit you have, the higher the correlation with

your Business success. And it takes some kind of grit to re-invent a process, a product, or an entire industry.

Gritty innovators in our businesses are often the ones that cause eyes to roll during staff meetings. (Can’t they just keep quiet this once, so I can get back to work?). Often, they are also the leaders (more on this later).

There’s a risk in silencing those innovators. Certainly a culture of ‘uniformity’ is the death of question asking. And, in some tragic situations, silencing the innovators can literally mean death. Studies of the Challenger shuttle fiasco concluded that a lack of argument (too much agreeability) was a leading cause of the disaster.

So maybe having a few ‘why’ people in the group might not be such a bad thing.

I was privileged to sit on a ‘productivity summit’ panel with several other business leaders in Alberta this November, facilitated by Amanda Lang, for GoProductivity. The statistics for productivity in Canada are interesting – Alberta is 44 per cent more productive than other Canadian provinces. It looks worse when you learn that much of this is directly a result of sweat equity – i.e. working more hours. We know that it can’t go on forever, which dooms us to lower future productivity – unless we can find new, less labour-intense ways of doing things.

There’s another interesting statistical contributor to Alberta’s productivity – a relatively higher level of investment in machinery and equipment as a consequence of a dramatically higher local cost of labour.

Necessity is the mother of invention – and innovation.

Unfortunately, our businesses often neglect improvement until we’re faced with a dire scenario. We cut back our workforces because we missed our quarterly targets, we outsource to specialists, and we automate to compete with the big new entrant in our market.

The leaders on the productivity panel discussed innovation with something akin to reverence – they’re continually learning new ways to deliver services and solutions and encouraging their teams 18

to innovate on the fly, from the shop floor on up. It’s the secret sauce in their success.

One panelist from a huge industrial mining company said they actually celebrate failure in their business – each instance of a failure is recognized at an annual event – because it means someone tried to do something new.

Innovation often comes at a cost – either experiential, time, resources, or putting our egos at peril because we face failure or ridicule.

Tough choice. But who wants to grow, anyway?

I alluded earlier to leadership. While a lot of innovation arises from every day creativity (small-c innovation), don’t worry, it’s easily stifled in your business.

Here’s how you can build a first rate antiinnovation empire: 1. Stifle communication. Make sure people have no cross-silo conversations, and for sure, do not build an inter-web (communal virtual whiteboard) for people from all across your organization to post crazy ideas.

2. Give power to people who don’t like change. This is a sure thing – especially if you have subject matter ‘experts’ in key areas of your organization who control the flow of needed resources and information.

Remember what we said about experts – they’re committed to what they already know.

3. Be sure to have a president’s circle of ‘special people’. Whew – you dodged a bullet there – because staying in your own network with the same people you always hang with will ensure you protect the status quo. And you don’t risk meeting new, or different, people, which is always risky.

So now you have a winning strategy for keeping your business exactly the way it is.

And you know the other kind of leader – like that crazy Elon Musk, founder of Tesla motors and SpaceX, who is spearheading a revolution in transportation. You want to avoid that at all costs since his ideas are going to take some hits.

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

But what if he’s right?

Our businesses might be working well today – but what about tomorrow? Can we attract new younger, tech savvy employees? Can we do more with less?

Are we leading the pack or trailing behind?

I’m willing to bet if you’ve read this far (thank you, by the way), you’re one of the crazy Elon Musk types. But while leaders are often natural innovators, they’re also often thwarted trying to organically inspire change from the top down.

Research on this topic by McKinsey & Company concluded that a key driver is a culture of trust at all levels.

So, leaders, start with that. Of course, it’s not the only thing you need to do.

You can create an innovation incubator in your business (but please, please don’t form an innovation committee). Instead, hold ‘blue sky’ meetings with people from all walks in your organization – and don’t judge the answers. Call them your ‘what if’ sessions. Post all the answers and leave them up. Let people add to them. Budget for a few failures – Jim Collins’ book ‘Great by Choice’ says “fire bullets, then cannonballs.” In other words, try stepping out a little bit, test the water before you commit big time to a brand new ship. Hold an annual ‘We Tried and We Failed Awards’ night. Hire people from totally unrelated industries to bring diversity to the table. When the ‘new guy’ asks a question, don’t answer it until you know why he asked it.

And be sure to include those folks you’d normally avoid on your morning coffee stroll. Simple solutions to enduring problems can be right under your nose – but you might never find them if, like so many people, you got great scores on all your school tests by forgetting how to ask ‘why?’ Encouraging rather than stifling curiousity takes the limiting brackets off your potential.

It’s not too late. You can start tomorrow. Take the brackets off your business, and see where you go.

Angela armstrong is the founder of the Prime Capital Group – a super interesting team of people who regularly brainstorm to creatively solve problems, including how to brainstorm, for a great portfolio of Canadian business clients. Prime specializes in equipment finance solutions. Angela specializes in asking questions. www.pcclease.com

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Technology Report

Cleared for Takeoff The rise of online lease financing in Canada

By Stan Prokop

he rise of online lease and other financing solutions in Canada clearly makes no sense to those who subscribe to the adage ‘neither a borrower nor a lender be’. The advantages of the online business model are significant to lessees and lessors alike. Let’s examine some key aspects of the maturity that Internet innovation has brought to the online borrowing marketplace.

For those that have not or will not consider an online solution, one thing is for sure – squeezed profits. Traditional bank and commercial finance companies have observed a huge rise in online efforts by niche competitors in such areas as ‘payday loans’, merchant advance, auto financing, and of course, our focus – equipment financing.

Second tier non-bank lenders, including brokerages and non-direct lenders, suddenly find themselves being

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able to level the playing field in key areas such as cost of customer acquisition, funding turnaround time, and the ability to achieve higher revenues.

Competitive solutions Why do borrowers embrace the online solution? The clear answer is that it provides the applicant with the ability to source competitive solutions without the time and expense associated with applying for business credit. There is one challenge though, and that’s the ability of the borrower to feel secure in the application process, as well as knowing that rate and service won’t be sacrificed. Optimal lease solutions combine competitive pricing with speed of approval and processing.

Caveat emptor – not all online financing solutions provide instant approval/customer feedback. Many are structured as part of a marketing initiative to engage the client directly or in person. Using equipment leasing as an example, a robust online solution

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

will offer ‘cradle to grave’ quoting, documentation, and funding.

e-Signatures for validation A newer trend is the ability of successful online lenders to offer such services as electronic signatures, which have become more popular over time. This newer technology is very important in financial transactions to validate signatures and to validate the authenticity of lease documents. And the good news – fraud has always been much less prevalent in the Canadian finance landscape vis-a-vis the U.S. counterparts.

Prospective online lessees in Canada do not want to be told how they must finance; they want choices while still being able to take advantage of various tried and true lessor tactics including zero-interest leases, buy now/pay later deals, etc. More sophisticated borrowers have always had the ability to easily calculate such things as rates and purchase options.

Technology Report

Vendor benefits Online financing solutions have tremendous benefit for vendors. For those firms not able to install captive finance, facilities partnerships with credible online offerings offer all the traditional advantages associated with customer financing solutions, most notably higher revenues, less investment in receivables, and the ability to allay customer concerns on pricing and budgets. That has been the vendor financing mantra even before the Dead Sea was ill.

We spoke to Chris Waite, a co-founder of Catalyst Finance. His long established and successful national lease brokerage has embarked on a new offering in the online lease financing market, focused on an all-Canadian solution. That offering, marketed as ‘SPRINT LEASE’ is cloud based and offers the following benefits to vendors and lessees alike: ◉◉ Real time competitive rates ◉◉ Fast simple paperless process ◉◉ Instant quoting ◉◉ Ability to access system from

any web enabled device Will online financing solutions displace face-to-face lessor/lessee contact? Major lessors in the lease finance industry have clearly not abandoned revenue opportunities generated by their sales ‘top guns ‘, whose services are often focused on longer-term sales and client retention objectives, including the ability to manage larger more complex transactions. While online leasing delivers almost immediate results for the lessor and lessee, Waite notes that his firm hasn’t abandoned their traditional lease brokerage business model, and it is, in fact, constantly in search of qualified lease reps. Rather, the new solution is aimed at lessees and vendors who want a self-serve solution to save time and money and to enhance new and existing relationships.

Quicker, easier We asked Joe Sarvari, president of Coding Canada for his perspective. He notes that the Sprint Lease solution rolled

out by Catalyst will make it ‘quicker and easier for clients to access the financing required to grow their business’.

Optimism in the Canadian equipment financing industry is at an all time high, with Waite noting that key asset categories such as technology, software, automotive, construction equipment, machine tools, and medical and printing equipment continue to be easily accessible under the Sprint Lease online solution.

Online lease solutions are a clear example of harnessing the Internet.

Simplicity and speed provide that double whammy of customer satisfaction. Enduser price objections for capital assets, always subject to ‘sticker shock’, instantly become small and attractive payments, and next to instant credit approval have always been a perennial selling tool for the industry.

Stan Prokop is principal at 7 Park Avenue Financial and specializes in business financing for Canadian firms, such as working capital, cash flow, asset based financing, equipment leasing, franchise finance and Canadian tax credit finance. Founded in 2004, the company has completed in excess of $90 million of financing for Canadian corporations. www.7parkavenuefinancial.com.

canadianequipmentfinance.com | november/december 2014 | CANADIAN EQUIPMENT FINANCE

21

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Coming Soon Your guide to the world of telematics in Canada

Industry Report

State of the Equipment Finance Industry Report he equipment finance market is projected to reach $903 billion in 2014, according to ‘2014 State of the Equipment Finance Industry Report’. The study, published by the Equipment Leasing & Finance Foundation and authored by Keybridge Research, provides a unique look at trends in the equipment finance industry over the past year, identifies key drivers for future growth, and projects what the industry might look like in five to ten years.

“This year’s milestone 25th anniversary of the Foundation also signals an equipment finance industry milestone with the approach of $1 trillion in market size,” says Richard Gumbrecht, chairman of the Equipment Leasing & Finance Foundation and chief growth officer, EverBank Commercial Finance, Inc. “Despite macroeconomic data that indicates our industry may experience slowing growth compared to the rapid pace of the past few years, equipment finance companies of all shapes and sizes continue to find ways to improve business processes, enhance the customer experience, and provide much needed capital to the U.S. economy.”

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Key findings from the report include: ◉◉ Strong overall performance despite industry challenges in 2013: Equipment and software investment is again at an all-time high

percentage of GDP despite slow macroeconomic growth and a waning replacement cycle. In equipment finance, slower growth and unprecedented levels of liquidity created an environment of intense competition. Profitability dipped slightly, yet portfolio performance surpassed the previous year’s all-time best. A slow but steadily improving economy, solid corporate profits, and a focus on credit quality led to the lowest delinquencies and charge-offs on record. ◉◉ Propensity to finance increased in 2013 due to continued low interest rates: Leasing and financing have enjoyed solid, albeit slower, growth over the past several years.

Total new business volume grew 9.3 per cent in 2013 which, while down from 16.4 per cent in 2012, is still a major improvement from the contractions and slow growth immediately following the recession of 2008-2009. ◉◉ Regulatory uncertainty less of a concern, but global tensions loom: After the government shutdown in 2013, policy uncertainty has steadily declined, which has improved confidence in the equipment finance sector. However, replacing the domestic uncertainty of 2012-2013 is a significant degree of geopolitical tension, including the Russia-Ukraine conflict

and the U.S. intervention against terrorist groups in Iraq and Syria. Although the economic consequences of these conflicts have been relatively minor thus far, they have raised concerns over the stability of the European economy and the potential for a global oil price shock. ◉◉ The equipment finance market is projected to reach $903 billion in 2014: A solidifying economic recovery points to faster equipment and software investment growth in 2014. Total public and

private sector equipment and software investment grew by only 3.2 per cent in 2013, but the equipment finance industry increased more than eight per cent due to rising propensity to finance. Most investment activity was the result of an ongoing replacement cycle across many sectors.

About the Equipment Leasing & Finance Foundation.

The Equipment Leasing & Finance Foundation is a 501c3 non-profit organization that provides vision for the equipment leasing and finance industry through future-focused information and research. Funded through charitable individual and corporate donations, the Foundation is the only organization dedicated to future-oriented, in-depth, independent research for the leasing industry. In 2014, the Foundation celebrates its 25th anniversary. Visit the Foundation online at www.

LeaseFoundation.org. Follow the Foundation on Twitter @ LeaseFoundation.

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23

EVENTS

WHERE TO GO. WHAT TO SEE.

Find out more about the conferences, exhibitions, seminars and meetings in your industry

2015 January 20-22 18TH Annual AFSA Vehicle Finance Conference & Exposition San Francisco, CA www.vehiclefinanceconference.com

February 8-11 IMN (Information Management Network) ABS Vegas 2015 Last Vegas, NV www.imn.org

February 22-24 Equipment Leasing & Finance Association ELFA Equipment Management Conference Miami, FL www.elfaonline.org

April 15-18

May 6-8

Factoring Association 20th Annual Factoring Conference New Orleans, LA www.factoring.org

Equipment Leasing & Finance Association Public Sector Finance Forum Denver, CO www.elfaonline.org

April 21 Equipment Leasing & Finance Association ELFA Bank Best Practices Roundtable Chicago, IL www.elfaonline.org

April 21 Equipment Leasing & Finance Association ELFA Captives Best Practices Roundtable Chicago, IL www.elfaonline.org

April 21

National Heavy Equipment Show (NHES) Toronto, ON www.nhes.ca

Equipment Leasing & Finance Association ELFA Independent Best Practices Roundtable Chicago, IL www.elfaonline.org

March 12

April 21-23

Equipment Leasing & Finance Association 13th Annual IMN/ELFA Investors Conference New York, NY www.elfaonline.org

Equipment Leasing & Finance Association ELFA 27th Annual National Funding Conference Chicago, IL www.elfaonline.org

March 15-17

April 30-May 2

Equipment Leasing & Finance Association ELFA Executive Roundtable Palm Beach Gardens, FL www.elfaonline.org

Nat’l Assoc of Equip Leasing Brokers NAELB 2015 Annual Conference Phoenix, AZ www.naelb.org

April 15-20

Equipment Leasing & Finance Association ELFA Legal Forum Nashville, TN www.elfaonline.org

March 5-6

National Equipment Finance Association NEFA 2015 National Equipment Finance Summit Long Beach, CA www.nefassociation.org

May 3-5

May 13-14 Equipment Leasing & Finance Association ELFA Capitol Connections Washington, D.C. www.elfaonline.org

June 7-9 Equipment Leasing & Finance Association ELFA Credit & Collections Management Conference Washington, DC www.elfaonline.org

September 16-18 Equipment Leasing & Finance Association ELFA Operations & Technology Conference Philadelphia, PA www.elfaonline.org

September 16-18 Equipment Leasing & Finance Association Lease & Finance Accountants Conference Philadelphia, PA www.elfaonline.org

September 16-18 Canadian Finance & Leasing Association CLFA Annual Conference 2015 Gatineau, QC www.cfla-acfl.ca

October 25-27, 2015 Equipment Leasing & Finance Association ELFA 54rd Annual Convention San Antonio, TX www.elfaonline.org

Visit us online www.canadianequipmentfinance.com/events.html 24

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

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25

Observations

Should It Stay or Should It Go: The challenges of derelict equipment

By Rob Birnie

few weeks ago, our team was completing an appraisal of a fleet of fuel transport trailers. A number of the trailers had been manufactured back in the 1970s, were deployed on daily routes, and showed no signs of being retired from the fleet. As I walked across the yard, I noticed a derelict loader sitting in an adjacent yard and it got me thinking. What circumstances lead up to a machine of this type being effectively abandoned to the elements?

Years ago, an acquaintance ran an old Allis Chalmers HD16 dozer. He was a small independent operator and did a variety of road right-of-way work as well as small scale clearing operations.

That dozer was a dinosaur and had such ‘modern’ convenience features as a cable lift and manually adjusted blade angle.

But the machine was worked, and worked hard, every day. If an appraisal were to be performed on it, its value would likely be quoted on a per-pound basis; but the reality was that the machine made money every day and didn’t owe anyone a single dime.

We see old equipment being worked at job sites every day. This equipment represents value to the operator. Offhighway logging trucks and equipment for which no new equivalent machine

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has been produced in decades, are commonplace in the field and, in many cases, extensive refits are performed to keep these machines running. Tank trailers can have an extremely long service life as the bogies are effectively the only component subject to wear. The question one has to ask is, at what point does it make sense to replace (as opposed to repair) a working machine?

The economics of repairing aging equipment frequently points to replacing it with new equipment. The reality is that all mechanical components wear and eventually every component will require replacement. The immediate maintenance costs associated with inframe engine rebuilds, transmission replacements, and the multitude of minor systems which are susceptible to age related wear, can be offset by an amortized capital expenditure of new equipment. The reliability of new equipment, coupled with the intangible productivity improvement frequently experienced when an operator is running ‘bleeding edge’ machinery, goes a long way toward improving the bottom line.

The reality is that a working machine is generating revenue and any idle time is a cost to the business.

The resale of aged equipment presents a challenge. The buyer is faced with both the capital expenditure as well as the projected short-term maintenance costs.

CANADIAN EQUIPMENT FINANCE | November/December 2014 | canadianequipmentfinance.com

To mitigate the projected maintenance expenses, a buyer will exert significant pressure to reduce the cost of acquisition – which is reflected in a sharp decline in market values once equipment age approaches that of the first projected major overhaul.

In our experience, there is a point where an owner needs to make the decision to either commit to ongoing major refit costs or sell the machine. A delay in making this decision (as with most decisions in life) can result in the decision being made for the business – and catastrophic failure of a component at a time when the machine is needed on a project can quickly relegate that machine to the ‘back 40’.

In many cases, there is an emotional component which may override the economic factors driving replacement.

In the case of off highway logging trucks (and even an old cable-lift HD16), there is a sense of pride in keeping old equipment working – and owners can often be compared to collectors of local history.

Job sites can be something of a living museum with old equipment working side-by-side modern units – all within the shadow of an abandoned relic.

ABOUT THE AUTHOR: Rob Birnie is a Certified Machinery and Equipment Appraiser (CMEA), Master Marine Surveyor (MMS Senior Business Analyst (SBA), and an active member of the Canadian Finance & Leasing Association. Rob has applied his hands-on experience in mechanical and marine repairs and more than 19 years of insurance damage appraisal, valuation and loss settlement experience to create and direct Verus Valuations.

At Element Financial we help North American businesses finance the essential capital equipment that makes them productive, profitable and powerful.

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