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Leasing vs. Banking
Banks serve an important role in the growth of your business. However, there are key features and deciding factors to bank loans that are not required when leasing.
Line of Credit
~ If you currently have an LOC with your bank a lease may be deducted from your Line of Credit even if not directly borrowed from the LOC. Before accepting a lease from your bank, ask if the amount will be deducted from the LOC you are hoping to protect.
Account Balance ~ A minimum account balance may be required to borrow from your bank and if you are sensitive to rate, then that should be taken into account. (Ask your financial
advisor for specifics.)
Additional Collateral & Liens
~ Only in very special cases will a leasing company require additional collateral. Generally, the leased equipment IS the collateral and no other collateral is required. However, banks require it quite often and may attach a lien to your business until the loan is paid off. Additional collateral may consist of other pieces of equipment and/or real estate. Blanket liens may include accounts receivables and/or inventory.
Amount of the Loan
~ A traditional bank loan covers 80% of the cost, requiring 20% down, serving as immediate equity. The 80% does not include taxes, installation, service contracts, freight, any other “soft costs” or non-valued items. Leasing, however, will cover 100% of the cost, including the “soft costs” mentioned above. Your down payment will be your first payment and either your last payment or a security payment.
Credit
~ The credit window for a bank is strict and narrow. Your credit score needs to be high, your bankruptcy score low and your credit clean... no late payments, no open suits, liens or judgments, no bankruptcy in your past. Things of that nature.
The greatest difference between a bank loan and a lease is
the affordability of getting a lease.
MAX Example
Equipment cost = $ 20,000.00 This would be your out-of-pocket expense if you purchased this piece of equipment today.
vs.
Gross profit resulting from the use of the equipment $1,000.00
Monthly lease payment 450.00
Net profit from the use of the equipment $ 550.00
You can be $550.00 ahead or $20,000.00 behind.
Accounting Benefits to Leasing
A lease is an unique financial tool in that the equipment can be depreciated or expensed, offering different types of tax advantages for different types of businesses. Discuss accounting specifics with your
financial advisor. At lease end there is the option to purchase outright, extend the lease or turn in the equipment and lease something new, avoiding obsolescence.
A true lease can provide the lowest payment of any method of equipment acquisition and terms may be longer than debt financing. Payments on an operating lease do not show up on the balance sheet as debt, therefore, not affecting the company’s ability to borrow, an answer to capital budget problems. Here are a few other benefits to leasing:
- Lower upfront payments.
- Conserves working capital.
- Fixed payment, fixed term simplifies budgeting.
- If your business is measured by “Return on Assets,” leasing will improve your ratio.
- Leases reduce the debt/equity ration enabling your firm to borrow more money.
Leasing is NOT an alternative to a loan
The definition of a lease is “a contract by which one conveys equipment for a specified term and for a specified rent.” The leasing company purchases the equipment, holds title and rents it to
the lessee for a monthly fee. There is not a finance charge or interest rate but a rental fee.
A loan is the borrowing of money where there is a specific finance charge. The equipment is used as collateral and may not be a deciding factor as to approval of the loan..
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