Technical Papers Blog

Lease vs. Loan Considerations

Lease vs. Loan Considerations

3/20/2017

All businesses need up-to-date equipment to run their company and stay competitive. Common methods of paying for this equipment include revolving lines of credit, term debt and equipment leases.  While all three have their pros and cons, it is important to leverage cash flow to purchase an asset to be used in business and let that asset pay for itself through your operations. In other words, obtain the equipment with little or no upfront cash (cash that can be used to grow your business) then use the equipment to generate more, profitable business.

How do you decide which option is best for you? 

Here are three key factors to consider:
 

1. Fixed vs. Variable Rates

Equipment leases have fixed rates while revolving lines of credit typically have variable rates.  With rates at historic low levels, any rate fluctuation could increase financing costs and drastically affect an organization’s budget. 
 
If the equipment has a short useful life, say five years or less, leasing companies can offer an effective rate of 0% or better through a rental agreement.  With a Fair Market Value (FMV) lease structure, organizations can return the equipment at the end of the lease and upgrade their aging equipment.  Companies that employ this strategy pay less than the total equipment cost.
 

2. Favorable Terms

It is critical to understand contract terms and conditions when evaluating loan and lease agreements.  For example, loans or revolving line of credit agreements almost always contain performance and restrictive covenants, and are subject to blanket liens.  Equipment lease agreements do not generally include covenants.  Further, the only collateral or security for a lease is the actual leased equipment.
 
Even seasoned borrowers can find it difficult to accurately analyze all the costs associated with loans, lines of credit or leases.  Additional fees that you will be responsible for can be hidden in the fine print.  

Financing or leasing costs can be boosted by thousands of dollars of fees, significantly impacting the effective rate of the transaction.  Some of the additional fees with leases or additional costs associated with loans and lines of credit include:

  • Application fees

  • Commitment fees

  • Non-use fees

  • Restructuring fees

  • Location fees

  • Restocking fees

  • Annual renewal fees

  • Term out fees

Top equipment leasing companies have straightforward, simple contracts with no fees - no set-up fees and no non-use fees.  In the absence of fees - hidden or otherwise - the only component you need to consider in your analysis is the rental payment. 
 

3. Insist on Excellence

Choosing the right financing partner for your leasing and financing is a crucial step.  There are thousands of banks and leasing companies in the industry - and no two companies are the same.  Understanding the lessor’s reputation for transparency in all business dealings can be more important to the economics of the transaction than the monthly payment.  Proposals can include deceptive language like “pricing is based on current market rates” or “pricing may change upon funding” with no detailed information on how the pricing may change. 
 
All financing companies will tell you about their outstanding service model.  However, many banks and leasing companies provide multiple contacts for the different aspects of your relationship with them.  They may provide hotlines and auto-attendants full of prompts you must go through for any issues that may arise.  After following the prompts, you may be directed to overseas customer service.
 
Top equipment leasing companies have solid reputations in the industry, proven results, transparent terms and conditions, and make doing business easy for their customers.  They provide one single point of administrative contact to handle all aspects of your relationship with them.  This kind of honest lending philosophy provides borrowers with a solid complement to traditional banking products.

ABOUT FIRST AMERICAN EQUIPMENT FINANCE

First American Equipment Finance is a part of City National Bank.  First American is an experienced lessor specialized in serving the most sophisticated corporate borrowers.  First American provides simple, innovative financing solutions for complex projects. First American specializes in combining products and services from multiple vendors and service providers into a single equipment lease. First American has a long standing reputation for professionalism and exceptional service throughout the U.S.

Comments
Blog post currently doesn't have any comments.
 Security code
Top