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LEASE VS. BANK FINANCING
EVERYTHING YOU ALWAYS WANTED TO KNOW BUT DIDN’T KNOW WHO TO ASK
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I'm Going To Use My Bank Financing!
We hear this from time to time when we are trying to compete on a financing transaction. Most people who go with their bank do so because they are interest rate shoppers (ignoring all other aspects) and the concept of doing business with their "Bank" gives them a sense of security and fair dealing. "My Banker, my friend" is the concept. After all, you've had your account there for years, they take care of all of your money, they have extended you a line of credit to handle all of those little emergencies or unforeseen opportunities, he knows you by name (or at least recognizes you) when you go to the bank, his interest rates are quite low (you have compared them to other banks and leasing rates) and it keeps things uncomplicated for you if you have only one financial institution to deal with.
What's Wrong With This Picture!
Lots of things. We are going to make it easy to compare bank financing to leasing by outlining the differences below, however, let me ramble for a minute. Have you noticed all of the bank mergers lately? Have you also noticed the turnovers that occur as a result? Your friendly banker may not be your banker tomorrow. Since relationships are so important for future needs, the relationship you developed with your banker may not be there when you need it for future borrowing needs. Additionally, have you ever been successful in getting anything done at your bank in a quick and efficient manner without a lot of unnecessary paperwork and red tape? Banks are the best example that I can think of to demonstrate the service difference between salaried help (bank employee) and commissioned help (the leasing industry). Following are some very important points to consider (besides interest rate) in making your financing decision:
Rate Structure
Banks prefer to loan long term money on a floating or variable rate tied to prime, or some other indices. This places the rate risk on you instead of the bank.
Lease rates are fixed for the term of the lease.
Soft Costs
Soft costs are such things as sales tax, shipping,
installation, training, software, etc. Your
friendly banker is more than likely not going to
finance these integral parts of your equipment
financing need. They are more concerned about
their exposure and risk than the practical
servicing of your needs.
Leasing is 100% financing and covers all of these costs.
Down Payment
Banks typically require 10 to 25% down on any equipment
financing. Once again, they are more concerned
about their exposure and risk and less concerned
about your practical business needs (e.g.
retention of working capital).
Leasing is 100% financing.
Compensating Balances
Most banks willrequire that you maintain certain minimum balancesif you want their lowest rates. Think about this
one for a second; if you maintain certain balances
that they pay you no interest on, this inflates
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 of restrictions and covenants, such as
maintenance of certain financial ratios,
restrictions on future debt and salary
restrictions. Additionally, look for "Call"
provisions which banks incorporate that give them
the right to demand an early pay-off of your loan
for reasons you have no control over.
Leasing has
none of these types of provisionsn. |
Revolving Loan Basis
Banks prefer to classify 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 of Financial Statements
for review and approval. Additionally, this loan
is now a current liability which really messes up
your financial ratios.
Leasing is fixed long term
financing.
Blanket Lien On Business
Banks take a security interest in all of your company's assets
(presently owned and acquired in the future) by
publicly filing a UCC. This ties up all of your
assets, including inventory and receivables.
Leasing files a UCC only on the leased equipment.
Disclosure
Banks want a full financial 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 for the company, and
generally the principals also. This restricts
future borrowing.
Leasing offers a multitude of
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 further information.
Leasing is
often a 48 hour approval cycle.
Tax Write Off
Since bank financing makes you the owner of the
equipment, your only tax advantage is depreciation
and loan interest (watch out for AMT).
Lease
payments are 100% deductible and may be a form of
accelerated depreciation depending upon structure
(ask us about this one). |
What Should I Do?
Analyze and understand the concept presented here. Then, compare it to your business situation to see if it applies and which situation is best for you and your Company. If you agree that Leasing in most situations is the least cost method of acquiring the use of needed equipment, then call us at (818) 998-6125. We are MARKAY LEASING CORPORATION and we would welcome an opportunity to explain our programs and become your Leasing company and finance partner.
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