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Lease vs Loan
When you take on a loan, you borrow money to make a purchase. Leasing, on the other hand, is a term rental agreement for the use of specific equipment. As a means of financing, loans and leases have benefits and drawbacks. Below are some major considerations that will affect your equipment acquisition decisions.| Rates | Loan - Rates are usually
floating and based on Prime Rate or another similar
index such as LIBOR. As the index fluctuates, your
monthly payment changes with it. This is beneficial
during periods of falling interest rates and detrimental
to your business when interest rates rise. Lease - Payments are generally fixed for the life of the lease unless the lease has special provisions. Leasing can provide business owners peace of mind, especially in times of rising rates. |
| Amount Financed | Loan - Banks generally
only lend a portion (60%-80%) of the equipment cost;
exclusive of soft costs such as shipping, training,
installation, etc. Lease – We are able to finance the complete equipment acquisition which will often include soft costs, shipping, installation, training and sales tax. Out-of-pocket costs are usually limited to the first month's investment or a small security deposit. |
| Extra Costs | Loan - Banks use fees to
boost their rates of return on loans. These fees
include application fees, origination fees, commitment
fees, schedule fees, funding fees. These fees are
charged for expenses associated with approving and
executing the loan application. Lease - In 99% of small-ticket equipment leases (up to $75,000) there are no origination, commitment or application fees. Documentation fees are minimal, ranging from $95 to $250 depending on the transaction size. In general, leasing provides more control over fees. |
| Available Terms | Loan - Banks tend to be
somewhat less flexible than leasing companies. That's
fine if you are looking for a standard term. But if you
need more flexibility, you may be stuck with little or
no options. Lease - In most cases, you have the option of choosing the term, the purchase option and the down payment for your equipment lease. We offer 60-month terms on most equipment and up to 72 months on some asset classes. Custom terms can easily be arranged depending on your needs and financial outlook. |
| Equipment Types | Loan -Banks won't finance
equipment they don't understand or feel has limited
collateral value. Because of this, many companies
working in smaller industries or less mainstream
industries can be shut out of the lending process.
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| Ease of application | Loan - Regardless of the
amount requested, most banks won't begin to review your
credit until you supply a full financial package based
on their specific regulations. Lease - Our business goal is convenience. We are completely service-oriented. We know that your time is precious therefore we offer lease programs up to $150,000 without requiring financials. In most cases, we can approve your equipment lease based solely on a complete application. We’ve learned that what keeps us competitive almost always keeps our customers competitive too. |
| Speed | Loan - Banks are slow
credit decision makers. It can take weeks to prepare
your request and bring it to the credit committee for
review. Lease – We know that time is of the essence when it comes to equipment acquisition. More than half of our approvals are issued the same or next business day. |
| Collateral | Loan - Banks usually
secure their loans by requiring additional collateral
such as real estate, equipment, inventory, receivables
or even your home. In fact, it is common practice for
banks to file a blanket lien against all of your
personal and/or company’s assets. Lease - In most instances, the only collateral needed to finalize your lease is the equipment being leased. |
| Restrictive Covenants | Loan
– Bank loans often require that the
borrower maintain certain minimum
financial ratios and report them to the
bank on a quarterly or semi-annual
basis. If the borrower fails to maintain
those ratios, the bank can call the
loan. They can also place restrictions
on or limit future borrowings from any
institution. Lease – Generally, leasing does not call for such restrictive covenants. |
Many times, companies are not only weighing the options to lease their equipment versus borrowing money to purchase it. Often, they are also considering using their own cash to purchase the equipment they need. Below is a brief layout of often asked questions and answers that can help those faced with these choices.
Loan vs.
Lease/Cash |
|
| Can I avoid a large cash outlay? |
Cash
– Responsible for 100% of Down Payment Loan – Often as much as 25% Lease – Often requires no down payment with 100% financing |
| How will it affect my bank credit line? |
Cash
– Impacts your balance sheet immediately Loan – Decreases credit line Lease – No money is borrowed |
| How will it affect my operating capital? |
Cash
– Highest up-front costs Loan – Down Payment is most often required Lease – Low front-end costs |
| What will my payments be like? |
Cash
– 100% needed now Loan – Payments may rise with interest rates Lease – Fixed payments with possible tax benefits* |
| Can I upgrade/add on easily? |
Cash
– No Loan – Re-application often required Lease – Yes. Your lease can even be structured ahead of time to account for this option. |
| Can I schedule payments to match my cash flow? |
Cash –
No Loan – No Lease – Yes. Leasing provides various payment options that will mean the difference between growing your business or losing it. |
* Consult your tax and legal advisors for specific advice on the potential tax benefits of leasing for your company. We will always strive you provide you with the best options for your business but we strongly recommend that all options be reviewed with your tax advisor.