Leasing vs.

Banking

While banks serve an important role in the growth of your business, bank loans carry with
them certain limitations and determining factors that are not imposed when leasing.

Line of Credit ~ II you currently have an LOC with your bank, a lease may be deducted Irom
your Line oI Credit even iI not directly borrowed Irom the LOC. BeIore accepting a lease Irom
your bank, ask iI the amount will be deducted Irom the LOC you are hoping to protect.

Account Balance ~ A minimum account balance may be required to borrow Irom your bank. II
you are sensitive to rate, and then take this into account when considering a bank loan. (Ask your
financial advisor for specifics.)

Additional Collateral & Liens ~ Only in very special cases will a leasing company require
additional collateral. Generally, the leased equipment IS the collateral and no other collateral is
required. However, banks oIten require collateral and may attach a lien to your business until the
loan is paid oII. Additional collateral may consist oI other pieces oI equipment and/or real
estate. Blanket liens may include accounts receivables and/or inventory.

Loan Amount ~ A traditional bank loan covers 80 oI the cost, requiring 20 down, and
serving as immediate equity. The 80 does not include taxes, installation, service contracts,
Ireight, any other 'soIt costs or non-valued items. Leasing, however, will cover 100 oI the
cost, including the 'soIt costs mentioned above. Your down payment will be your Iirst payment
and either your last payment or a security payment.

Credit ~ The credit window Ior a bank is strict and narrow. Your credit score needs to be high,
your bankruptcy score low and your credit clean. That means no late payments, no open suits, no
liens or judgments, and no bankruptcy in your past.
1he greatest difference between a bank loan and a lease is
the affordability a lease offers.
ample
Equipment cost $ 20,000 (this would be your out-oI-pocket expense iI you purchased this
piece oI equipment today).
's.
Gross proIit resulting Irom use oI the equipment $1,000.00
Monthly lease payment 450.00
Net proIit Irom use oI the equipment $ 550.00
You could be up $550, or out-oI-pocket $20,000.


ccounting Benefits to Leasing
A lease is a unique Iinancial tool in that the equipment can be depreciated or expensed, oIIering
many tax advantages Ior diIIerent types oI businesses. Discuss accounting speciIics with your
Iinancial advisor. At lease end there is the option to purchase outright, extend the lease, or turn
in the equipment and lease something new, avoiding obsolescence. A true lease can provide the
lowest payment oI any method oI equipment acquisition, and terms may be longer than debt
Iinancing. Payments on an operating lease do not show up on the balance sheet as debt,
thereIore, not aIIecting the company`s ability to borrow. This could be just the answer to capital
budget problems. Consider these additional leasing beneIits:
1. Lower upIront payments.
2. Conserves working capital.
3. Fixed payments and a Iixed term simpliIy budgeting.
4. II your business is measured by 'Return on Assets, leasing will improve your ratio.
5. Leases reduce the debt/equity ratio, enabling your Iirm to borrow more money.
Rate Structure
Banks preIer to loan long term money on a Iloating or variable rate tied to prime, or some other
indices. This places the rate risk on you instead oI the bank.
Lease rates are Iixed Ior the term oI the lease.

SoIt Costs
SoIt costs are such things as sales tax, shipping, installation, training, soItware, etc. Your Iriendly
banker is more than likely not going to Iinance these integral parts oI your equipment Iinancing
need. They are more concerned about their exposure and risk than the practical servicing oI your
needs.
Leasing is 100 Iinancing and covers all oI these costs.

Down Payment
Banks typically require 10 to 25 down on any equipment Iinancing. Once again, they are more
concerned about their exposure and risk and less concerned about your practical business needs
(e.g. retention oI working capital).
Leasing is 100 Iinancing.

Compensating Balances
Most banks willrequire that you maintain certain minimum balancesiI you want their lowest
rates. Think about this one Ior a second; iI you maintain certain balances that they pay you no
interest on, this inIlates their actual yield well above your loan interest rate. Additionally, this
ties up your working capital.
Leasing has no such requirement.

Restrictive Covenants
Most bank loans contain all sorts oI restrictions and covenants, such as maintenance oI certain
Iinancial ratios, restrictions on Iuture debt and salary restrictions. Additionally, look Ior "Call"
provisions which banks incorporate that give them the right to demand an early pay-oII oI your
loan Ior reasons you have no control over.
Leasing has none oI these types oI provisionsn.Revolving
Loan Basis
Banks preIer to classiIy a loan as a "Revolving" loan. This gives them the ability to extend or
cancel the loan on a yearly basis. This means annual submission oI Financial Statements Ior
review and approval. Additionally, this loan is now a current liability which really messes up
your Iinancial ratios.
Leasing is Iixed long term Iinancing.

Blanket Lien On Business
Banks take a security interest in all oI your company's assets (presently owned and acquired in
the Iuture) by publicly Iiling a UCC. This ties up all oI your assets, including inventory and
receivables.
Leasing Iiles a UCC only on the leased equipment.

Disclosure
Banks want a Iull Iinancial package to help them make their credit decision on your loan.
Leasing is by Application to $75,000, $150,000 in some cases.

Lending Limits
Banks establish a maximum borrowing limit Ior the company, and generally the principals also.
This restricts Iuture borrowing.
Leasing oIIers a multitude oI lending options in addition to your company's bank lending
options.

Credit Review Process
The bank credit review process is long and tedious and generally requests Iurther inIormation.
Leasing is oIten a 48 hour approval cycle.

Tax Write OII
Since bank Iinancing makes you the owner oI the equipment, your only tax advantage is
depreciation and loan interest (watch out Ior AMT).
Lease payments are 100 deductible and may be a Iorm oI accelerated depreciation depending
upon structure (ask us about this one).