When comparing lease vs loan for the lowest rates, it is important to understand key terminology and points. Equipment leasing may be the best overall choice for purchasing your equipment.

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 likely not going to finance these integral parts of your equipment financing needs. Leasing is 100% financing and can cover all soft 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 and rarely requires down payments.

Compensating Balances :

• Most banks will require that you maintain certain minimum balances if you want their lowest rates. Think about this one for a second; if you maintain certain balances that they pay you no, or low, 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 and early payoff of your loan for reasons you have no control over. Leasing has none of these types of provisions.

Revolving Loan:

• 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 with your provincial Personal Property Registry. This ties up all of your assets, including inventory and receivables. Leasing files Personal Property Registry statements for only the leased equipment.

Disclosure :

• Banks want a full financial package to help them make their own credit decision on your loan. Leasing requires a one page application that can approve a lessee up to a $30,000.

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 alternative 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 request further information. Leasing usually takes 48 hours or less for an approval.

Tax Write Off:

• Since bank financing makes you the owner of the equipment, your only tax advantage is depreciation and the loans interest. Lease Payments may be 100% deductible or may be a form of accelerated depreciation depending upon the lease type and your company's financial structure.


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