While banks serve an important role in the growth of your business, bank loans carry with them certain limitations and determining factors that are not imposed 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. If you are sensitive to rate, then take this into account when considering a bank loan. (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 often require collateral 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.
Loan Amount ~ A traditional bank loan covers 80% of the cost, requiring 20% down, and 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. That means no late payments, no open suits, no liens or judgments, and no bankruptcy in your past.
The greatest difference between a bank loan and a lease is
the affordability a lease offers.
Example
Equipment cost = $ 20,000 (this would be your out-of-pocket expense if you purchased this piece of equipment today).
Vs.
Gross profit resulting from use of the equipment $1,000.00
Monthly lease payment 450.00
Net profit from use of the equipment $ 550.00
You could be up $550, or out-of-pocket $20,000.
Accounting Benefits to Leasing
A lease is a unique financial tool in that the equipment can be depreciated or expensed, offering many 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. This could be just the answer to capital budget problems. Consider these additional leasing benefits:
- Lower upfront payments.
- Conserves working capital.
- Fixed payments and a fixed term simplify budgeting.
- If your business is measured by “Return on Assets,” leasing will improve your ratio.
- Leases reduce the debt/equity ratio, enabling your firm to borrow more money.
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