Lease vs. Loan 

When comparing lease vs loan, or bank vs lease, for the lowest rates, it is important to understand key terminology and points.  Equipment leasing companies and lease funding sources may be the best overall choice for purchasing your equipment.

 

Rate Structure:  Banks prefer to loan long-term money on a floating or variable rate tied to prime, or some other indices.  This places the rate risk on you instead of the bank.  Lease rates are fixed for the term of the lease.

 

Soft Costs:  Soft costs are such things as sales tax, shipping, installation, training, software, etc.  Your friendly banker is more likely not going to finance these integral parts of your equipment financing needs.  Leasing is generally  100% financing and can cover all soft costs.

 

Down Payment:  Banks typically require 10 to 25% down on any equipment financing.  Once again, they are more concerned about their exposure and risk and less concerned about your practical business needs (e.g. retention of working capital).  Leasing requires little or no down payment.

 

Compensating Balances:  Most banks will require that you maintain certain minimum balances if you want their lowest rates.  This ties up your working capital.  Leasing has no such requirement.

 

Restrictive Covenants:  Most bank loans contain all sorts of restrictions and covenants, such as maintenance of certain financial ratios, restrictions on future debt and salary restrictions.  Additionally, look for "Call" provisions which banks incorporate that give them the right to demand and early payoff of your loan for reasons you have no control over.  Leasing has none of these types of provisions.

 

Revolving Loan:  Banks prefer to classify a loan as a "Revolving" loan.  This gives them the ability to extend or cancel the loan on a yearly basis.  This means annual submission of Financial Statements for review and approval.  Additionally, this loan is now a current liability, which really messes up your financial ratios.  Leasing is fixed long term financing.

 

Blanket Lien on Business:  Banks take a security interest in all of your company's assets (presently owned and acquired in the future) by publicly filing a UCC-1.  This ties up all of your assets, including inventory and receivables.  Leasing files a UCC-1 only on the leased equipment.

 

Disclosure:  Banks want a full financial package to make their own credit decision on your loan.  Leasing requires less intrusive information since ownership remain with the lessor.

 

Lending Limits: Banks establish a maximum borrowing limit for the company based on its debt and assets, and those of the principals.  This restricts future borrowing potential.  Leasing offers options in addition to your company's bank lending.

 

Credit Review Process:  The bank credit review process is long, tedious, and often information intensive.  The Leasing process requires a relatively short period of time for approval.  

 

Tax Write Off:  Since bank financing makes you the owner of the equipment, your only tax advantage is depreciation and the loans interest.  Lease payments may be 100% deductible or may be a form of accelerated depreciation, depending upon the lease type and your company's financial structure.