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On 11.06.09, In Leasing 101, by Celso
When considering the different financing options for acquiring equipment, a common question many businesses have is whether they should opt for leasing or bank borrowing. Although many businesses opt for bank borrowing because they might have a better understanding of how it works, there are some great benefits leasing can provide that should not be overlooked. Here is a quick break down of the benefits of leasing versus bank borrowing:
Leasing
- Sales tax payable over term of lease.
- Conserves valuable working capita.l
- Conserves Cash – 100% financing (no down payment).
- Fixed rate for life of lease.
- Keeps credit lines open.
- Transfers risk of equipment obsolescence to lender.
- Leasing can save your money.
- Eliminates risk of Alternative Minimum Tax.
- Recorded off the company’s balance sheet.
- Payments can be structured to creatively fit the borrower’s needs.
- Provides a quick and simple financing solution that can close in days.
- Saves bank credit lines for growing your business.
- Term of lease can be longer (60-72 months).
- Asset can be upgraded easier.
- Payments may be 100% tax deductible.
- Finance soft costs like freight, warranties, installation, training, etc.
- Reduces taxable income as lease is paid for with before-tax monies.
Bank Borrowing
- Sales tax due up front.
- Short term money is not used for long term purpose.
- Requires large down payment (usually 20% to 30%).
- Floating Interest Rate.
- Uses credit lines that could be utilized for operations 100% obsolescence risk.
- May be more expensive than leasing.
- Potential liability to Alternative Minimum Tax.
- Booked on balance sheet.
- Inflexible payments.
- Normally requires more time and paperwork to execute.
- Uses bank lines for depreciable assets.
- Term of loan is restricted (12-36 months).
- Asset harder to dispose of.
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