Leasing equipment has many advantages over traditional bank financing. The following
chart gives a good comparison between leasing and Bank Financing:
| |
Leasing |
Bank Financing |
| DOWN PAYMENT |
Usually two payments, or about five percent |
Typically 10 - 30%. |
| INTEREST RATE |
Fixed Rate. If market interest rates go up,
your lease payments stay the same. |
Usually floating rate; customer takes
all risk. If market interest rates go up, so does your payment. |
| TAX BENEFITS |
Usually 100% deductible; makes effective rate lower. |
Depreciation must be over five years. Principle not deductible. |
| EFFECTIVE COST |
Often lower than prime rate due to tax advantages term,
no down payment and no required compensating balance. |
Higher than published interest rate due to hidden cost. |
| OPPORTUNITY COST |
Leaves bank lines and cash free for investments that provide higher yield. |
Ties up bank lines possibly preventing more opportunities in the future. |
| TERM |
Up to five years on any equipment over $5,000 |
Usually 1 - 3 years |
| SOFT COSTS |
Will include software and installation cost in the lease. |
Usually will not finance software. |
| IMPACT TO FINANCIAL STATEMENT |
Footnote to balance sheet. No impact to ratios. |
Long-term liability. Reduces current ratios, increases debt ratio. |
| HIDDEN CHARGES |
None. |
Compensating balance, other bank charges. |
*Information provided by VAResources.
