Equipment Leasing v. Business Loans in 2013

By: Ryan Attelle

Many businesses need some sort of loan or financing to grow. In many cases they are looking for a way to obtain more equipment so that they have the tools they need to continue to grow there business. The question then becomes which is best for there situation, a loan or a lease. Both have there pros and cons, but often times leasing equipment rather than purchasing it though a loan is more favorable all around. This article explains why.
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A lease is simply a different form of financing, but depending on the structure, a leases can be accounted for differently on the balance sheets. There are some accounting and tax rules that have to be in place in order to see whether or not a lease is in fact a “true lease” or if a lease should be accounted for as a loan. The biggest thing people want to take into account when it comes to leasing equipment is the residual. The residual is what has to be paid at the end of the lease terms. If at the time the equipment is purchased the residual is cheaper that the fair market value then it usually needs to be accounted for as a loan and not a lease because it becomes what is called a “bargain purchase option”.

There are a number of reasons a lease in preferred over a loan. The first most tend to look at when weighing the pros and cons is the monthly payment. If there is a residual on the lease the monthly payment tends to be less than that of a loan. Typically a lease requires less money to get started. A lease agreement can usually be reached with a first payment, or a first and last payment. Looking at this means one might be paying only $1,000 - $2,000 dollars to get started with a lease verses the $10,000 it takes to get into a loan. At the end of a lease there is the residual as mentioned before. At this time there is an option to buy the equipment for the residual, or you can refinance based on that residual, or you can just return the piece of equipment. When the option to return has been chosen two things are conveniently being avoided. The first it the equipment becoming outdated and then being stuck with a useless piece of equipment. The other thing is not being responsible for the equipment's disposal. This is something many don’t think about.

Looking at the accounting side, a lease can be very beneficial because there is no need to carry the numbers for a lease on the businesses balance sheets. This is because it's not considered an asset or a liability. Rather it is simply an expense, like paying rent on a commercial property.

When a bank lends money there are usually fairly strict terms that adhere to the agreement for example having to pay with in a certain set time period every month, factoring these numbers from the liability growth in a certain percent of a businesses equity. With a lease agreement there is no liability of equity on the balance sheets. This means a businesses debt to worth ratio is not effected thus making it possible to actually obtain more equipment than is possible with a traditional loan.

The last thing to consider is the promptness in which one can find out if they qualify for the loan or lease. Being that the banks are regulated by the FDIC they have to adhere to strict rules and regulations that create time consuming webs of red tape. With a lease agreement, many times it is not necessary to submit endless financial statements allowing for a decision with in a few days rather than weeks.

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