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Relative Advantages of Lease v. Bank Loan |
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Bank Loan |
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Leasing |
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Interest Rates |
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Can be lower than effective lease rate; but floating rates can go higher than lease rate. |
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Fixed rate with fixed payments for the life of lease, but interest rate can be higher than bank loan. |
Credit effects |
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Reports as borrowing, and can affect future borrowing capacity. |
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Reports only if the borrower does not pay as agreed, reducing effects. |
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Terms |
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Usually 2-3 years |
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Up to 5 or 6 years |
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Opportunity Costs |
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Can affect bank lines, limiting future borrowings. |
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If sufficient cash flow to service lease payment, it can minimize for future opportunities. |
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Requirements |
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Financial statements required for most loans over $10k. |
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Financial statements usually not required for most leases up to $100k. |
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Down Payment |
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Typically 20% to 30% required |
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100% financing is possible |
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Hidden Costs |
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Compensating balances, other bank charges, loan covenants may apply. |
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Lease termination fee may apply. |
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Soft Cost Coverage |
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Usually cannot finance shipping and extended warranty costs, etc. |
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Most soft costs can be financed. |
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Sales Tax |
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Usually paid outside of financing. |
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Can be included in the lease amount. |
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Tax Benefits |
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Depreciated over the IRS’ useful life of the equipment. |
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Usually montly lease payments are deducted over the lease term. |
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Financial Reporting |
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Carried on balance sheet as debt. |
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Not reflected on balance sheet as debt, but long term commitment. |
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