An equipment finance offer can look simple (“here’s the payment”) while hiding the real decision in the fine print: buyout terms, fees, security, funding conditions, and what happens if your business hits a rough month. If you learn to read a term sheet like an underwriter, you’ll compare offers faster, avoid surprise costs, and negotiate the right structure (not just the lowest-looking payment).
Below is a practical, Canadian-focused walkthrough of the sections you’ll see in most equipment lease/finance offers—what each line means, which lines matter most, and how to spot deal-breakers before you sign.
A term sheet is the lender’s “headline agreement”: it summarizes the economics, structure, and key legal conditions of the deal. It’s not the full contract, but it previews what the contract will enforce.
Two important realities:
If you’re leasing-first (our default lens at Mehmi), the term sheet is where you confirm whether you’re getting a true equipment lease structure (with a defined end-of-term option) and whether the buyout/residual aligns with how long you’ll actually keep the asset.
For a quick primer on lease structures and end-of-term options, see how equipment leases work in Canada.
The fastest way to understand why a line is there is to see what risk it controls. A classic underwriting framework is the 5Cs: character, capacity, capital, collateral, and conditions.
Here’s how that maps to term sheet sections:
Lenders also price and control risk using “pricing for risk”: interest + fees rise when the lender believes monitoring and loss risk are higher.
Before you dive into every clause, scan these 8 lines first:
If any of these are unclear, pause. “Unclear” is how surprises happen.
The most common mistake is comparing offers by the monthly payment alone.
If your pricing is variable, it’s usually tied to a base rate environment. The Bank of Canada publishes the policy interest rate and updates it on scheduled announcement dates; as of December 10, 2025, the target was 2.25%. (Bank of Canada)
That doesn’t mean your equipment lease rate equals 2.25%—it means your lender’s cost of funds and risk pricing live in that world.
Some offers quote a factor (for example, 1.18x payback) rather than an annual percentage rate. A factor can be legitimate, but you need clarity on:
Rule: if you can’t calculate total dollars paid + buyout, you can’t compare the deal.
Use this quick framework to compare two term sheets:
All-in cost (rough) =
(Monthly payment × number of payments) + upfront fees + end-of-term buyout − any refundable deposits
Then ask: What do I own at the end? (Nothing? The equipment? An option?)
If you’re evaluating buyout structures, the end-of-term option is not a footnote—it can be the biggest line item after payments.
This is where leasing-first thinking pays off. End-of-term structure shapes payment, flexibility, and your exit.
Equipment leasing training materials commonly describe four end-of-term options; the key practical difference is how much “value” is left at the end and what choices you have.
Key point: FMV usually produces the lowest payment because you’re not paying the full asset cost through the term. FMV also often gives you choices: return, buy at market value, or renew.
Best fit: fast-changing equipment, uncertainty about keeping the asset long-term, or when you want flexibility.
Key point: fixed buyouts typically mean higher payments because you’re paying down more of the equipment during the term.
Best fit: you know you’ll keep the equipment for a long time and want certainty.
If the buyout is vague or “to be determined,” treat it like a risk flag. You want the term sheet to be explicit about the end game.
If you’re unsure what’s normal for your asset type, heavy equipment financing structures often differ from fast-depreciating assets—buyout flexibility matters more when resale markets are volatile.
Fees aren’t automatically bad. They’re often part of “pricing for risk,” especially when the lender expects more work or monitoring.
But you should classify fees into three buckets:
What to ask:
The equipment is often the primary collateral. Lessors place heavy emphasis on collateral because recovery often depends on selling the asset if there’s a default.
Common security components you might see:
Practical risk: if your equipment moves between provinces or job sites, clarify how location reporting works and whether cross-jurisdiction registrations are required.
This section is your funding checklist. Banks explicitly call out conditions precedent as terms that must be satisfied before funds are advanced (for example, “all security being in place”).
If your vendor needs payment fast, you want your documentation packaged early. Many repeat buyers use a master-style approach (one umbrella agreement with multiple schedules) to reduce future friction—similar in concept to a master lease structure used for ongoing equipment needs.
If you frequently add equipment, consider an equipment line of credit structure so each purchase doesn’t feel like starting from zero.
Covenants are the “rules of the relationship.” They can include reporting requirements, limits on additional debt, or financial tests. Banks describe covenants and conditions precedent as distinct categories of terms.
Even before a missed payment, lenders often react to:
In plain terms: lenders monitor capacity and conditions continuously, not just at approval.
This isn’t tax advice, but it’s worth understanding the usual moving parts.
CRA explains that registrants generally recover GST/HST paid or payable on purchases and expenses related to commercial activities by claiming input tax credits (ITCs), subject to eligibility rules and limitations. (Canada)
For lease payments, that often means GST/HST is charged on the payment and recovered through ITCs (when eligible).
If you purchase/own depreciable property, CRA groups assets into CCA classes and publishes common class rates (for example, Class 8 at 20% and Class 10 at 30% in many cases). (Canada)
If your structure ends with a fixed buyout (effectively ownership), your accountant will care about the timing and classification.
CRA provides a specific example of GST calculations in a sale-leaseback arrangement. (Canada)
If your term sheet involves refinancing or sale-leaseback, treat tax handling as a checklist item—not an afterthought.
If you’re considering that path, refinancing and sale-leaseback options should be evaluated on all-in cost and operational flexibility.
Here are the most common “looks fine until it isn’t” issues:
Ask: Is the end-of-term option clearly defined (FMV, fixed %, fixed $)? What happens if I want to return?
Ask: Provide a full fee schedule in writing, including any annual/monitoring fees.
Ask: If I need to exit early, what is the payoff calculation? Is there a prepayment penalty?
Ask: Is this equipment-only security, or all-assets? Any personal guarantees? Why?
Ask: What documents are required to fund in 48–72 hours? What’s the minimum viable package?
If you need additional working capital alongside the equipment (mobilization, labour, inventory), don’t force the equipment term sheet to do two jobs. Consider separating the needs: working capital financing can protect your operating cash while the equipment pays for itself.
Business: Alberta-based contractor adding a specialized attachment package to win a time-sensitive job
Need: $180K equipment package, install + freight included, vendor needed payment within a week
Offer A: Lower-looking monthly payment, FMV buyout “estimated,” fees not fully itemized, strict early termination language
Offer B: Slightly higher payment, explicit FMV terms and clear return/renew options, fees disclosed, realistic funding checklist
What the underwriter cared about: collateral quality and recovery; lessors often treat collateral as critical and prefer equipment with resale support.
Decision: The owner chose Offer B because:
Outcome: The job revenue covered payments comfortably, and at end of term the business upgraded rather than buying out—exactly what FMV flexibility is designed to enable.
If you have a term sheet in hand and want a second set of eyes, Mehmi typically looks at the “hidden levers” first—buyout, fees, funding conditions, and security—then rebuilds the structure so it matches your cash flow and equipment lifecycle.
If your deal needs a flexible lease-first structure, start with leasing and loan options built for business equipment. If speed is the priority and you’re weighing short-term options, be careful about repayment mechanics and total cost (not just approval): how merchant cash advances work is worth understanding before you sign anything.
A lease term sheet emphasizes end-of-term options (FMV vs fixed buyout) and asset return/upgrade paths. Loan-style offers emphasize interest rate, amortization, and ownership from day one. For most operators, the buyout structure is the practical difference.
You usually won’t know the exact dollar amount today because FMV is set at end-of-term based on market value. What you can insist on today is clarity on your choices (return/buy/renew) and the process for determining FMV.
Often because of fees, different buyout/residual assumptions, payment frequency, or early termination language. Use an all-in cost calculation and make sure buyout terms are explicit.
Typically, yes—GST/HST is charged on taxable lease payments, and eligible registrants may recover it through ITCs under CRA rules. (Canada)
They’re the items that must be satisfied before funding—often security registration, insurance, invoices, inspections, and payoffs. If your timeline is tight, these are the true critical path.
When you already own equipment with equity and need liquidity for growth or stabilization. But compare all-in cost and understand GST/HST mechanics—CRA even provides a sale-leaseback example that shows how tax can apply to lease payments in special cases. (Canada)
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