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Loan or Lease Bank loans are perhaps the most well known
method of borrowing money. However, loans are not always the best way to acquire equipment. We recommend that you get all the facts when deciding whether to use a loan or use leasing, and then make a
decision that is in the best interests of you and your company. Here is some information to assist you in evaluating your options.Conditions -
Frequently, banks will provide equipment financing with restrictions or covenants on borrowing. These may include:
- Requiring a minimum balance in accounts held at their bank.
- Filing a blanket lien that secures the loan with not only the equipment, but also, all of your business assets.
- Linking the loan with other collateral such as a mortgage on your building.
Most leases require none of those items and are typically secured with only a UCC (Uniform Commercial Code) Filing showing the Lessor as having title to the equipment. Cash Flow and Costs -
It is not uncommon for banks to ask for significant down payments when customers borrow money. Additionally, like the mortgage industry there are often many types of fees that are attached to loans, all placed under the heading "closing costs". Equipment leases are generally completed with simply a payment or two in advance and a minimal documentation fee to cover the cost of UCC filings.
Opportunity costs -
Bank loans typically take weeks (even months) to process. Very often, depending on the complexity of the transaction there are multiple layers of management that must evaluate and approve the credit request. Since leasing is dedicated only towards the purchase of equipment, the number of people making a credit decision is reduced. Rates -
There is often confusion about how rates work. Low rates are very important,
but we when we make monthly payments, we pay money – not rate .
The true cost of a transaction is the total of all of the payments we make,
regardless of the interest rate. Here are some examples of leases and loans.
Please note, that rates are based on credit approval and this example is for
comparison purposes only.
A $100,000 loan transaction at 6% for 30 years
(like a mortgage) has total payments of $215,838.19.
A $100,000 lease transaction at 10% for 36 months
has total payments of $116,161.87 – a savings
of $99,676.32 even though the interest
rate on the lease is 67% higher than the mortgage
(in this example). So which is cheaper? If the
payment is manageable, wouldn't it make sense to
save $99,676.32 of your cash, even if the rate
is higher? Especially if the lease was quicker
process, had fewer fees and did not require additional
collateral like your home?
The
same is true when compared with a home equity
line of credit. A $10,000 line of credit with
a variable rate of 4.25% at minimum payments
will cost over $20,000; that's assuming that
rate will not increase over 4.25% (the Prime
Rate averaged since 1989 is 7.8%). Contrast that
with a 36-month lease for $10,000 that has a
total cost of $12,035 – saving
you $8,000 of your money.
Tax Benefits -
Leasing may provide tax advantages depending on the type of lease, and the needs of your company. Banks have less flexibility when it comes to structuring transactions with the "bottom line" in mind. Its important to talk to your tax professional about what is the best structure for your business.
If you have questions about which is best for you, please feel free to give us a call so we can discuss your specific needs.
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