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Lease v. Bank Loan

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Approved Leasing Co: Omni Leasing Corporation
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In financing your business equipment, there are basically two choices: lease or buy it with funds borrowed from a bank. Making a thorough evaluation of which is more beneficial to the business is not simple, and may need the advice of financial and tax advisors. But here are some of the major points you can consider in deciding whether you should buy the equipment out right with a bank loan or lease it. You need to consider not only the payment amounts and effective interest rates, but non financial costs and a host of other factors.


Relative Advantages of Lease v. Bank Loan

	Bank Loan	Leasing



Interest Rates	Can be lower than effective lease rate; but floating rates can go higher than lease rate.	Fixed rate with fixed payments for the life of lease, but interest rate can be higher than bank loan.
Credit effects	Reports as borrowing, and can affect future borrowing capacity.	Reports only if the borrower does not pay as agreed, reducing effects.



Terms	Usually 2-3 years	Up to 5 or 6 years



Opportunity Costs	Can affect bank lines, limiting future borrowings.	If sufficient cash flow to service lease payment, it can minimize for future opportunities.



Requirements	Financial statements required for most loans over $10k.	Financial statements usually not required for most leases up to $100k.



Down Payment	Typically 20% to 30% required	100% financing is possible



Hidden Costs	Compensating balances, other bank charges, loan covenants may apply.	Lease termination fee may apply.



Soft Cost Coverage	Usually cannot finance shipping and extended warranty costs, etc.	Most soft costs can be financed.



Sales Tax	Usually paid outside of financing.	Can be included in the lease amount.



Tax Benefits	Depreciated over the IRS’ useful life of the equipment.	Usually montly lease payments are deducted over the lease term.



Financial Reporting	Carried on balance sheet as debt.	Not reflected on balance sheet as debt, but long term commitment.

Conlcusion

Bank loans may have lower interest rates, but a lease may be more beneficial to a growing company. Lease-related savings and efficiencies come from the ability to adopt new advanced equipment which the shops cannot otherwise afford, without impairing its bank borrowing capacity for future expansion. The advantage of lease would lie outside pure interest consideration. For a given situation, however, the interest rate may be the most relevant factor. One needs to consider carefully his individual situation to determine whether lease or bank loan is the better option.