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Merchant Card Service - Leasing - Lease vs Bank Loan
WHY NOT SEND THEM TO THE BANK?
1. Banks Prefer Not to Finance Equipment
Banks prefer leasing companies to finance equipment so they can finance the leasing companies. That way banks get the leasing company's expertise, selling power, processing capability and recourse guarantees. They prefer to buy paper in blocks of in millions instead of thousands. Therefore, banks do not make it easy or attractive for individuals or companies to get individual equipment loans.
2. Using the Equipment is More Important Than Owning It
Another point to consider, before running off to the bank for a loan, is the difference between ownership of equipment and use of equipment, when considering earning a profit. The only time ownership of an asset makes you a profit is when that asset appreciates in value - like real estate, patent rights, precious metals or collectibles. If it is going to appreciate, it makes sense to own it. If it is going to depreciate, then gaining only the use of the equipment is the most effective way for the time you need it.
Common sense is: If it appreciates, buy it. - If it depreciates, lease it.
3. Rates vs. Real Cost
There is a significant difference between rate and real cost. On the surface, it would appear that banks charges are lower rates than leasing companies and therefore, the assumption is that the cost of acquiring the equipment is less with a bank. In reality, it can be, and usually is, the reverse. Rate, is the cost per thousand of equipment per month, the 'interest rate' that is factored into the transaction is the least important consideration. What is more important is the terms and conditions. Let us compare a couple of choices.
Why the smart money leases equipment
Let us assume that we have a lease at a perceived rate of 11%. It finances 120% of the equipment cost because it picks up delivery, installation, training and initial supplies (soft-costs). It requires one month in advance, most of the time this amount is carried back into lease and payment at the end of lease. There is a lien only against the specific equipment leased. The leasing company will not bother the customer for the next three to six years as long as they make the payments. At the end of that term of the lease period, the customer can buy the equipment for its, then, fair market value (which is minimal); and during the lease period you will have fully expensed the lease payments for tax purposes.
Note: Lease duration is chosen by you, dollar amount of payment is variable to the length of time.
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On the other hand, you request for a bank loan.
A loan usually covers only 80% of the equipment and none of the soft costs . It is at 8.5% interest rate or higher, but the customer is required to keep 30% of the loan amount in compensating balances in a non-interest bearing account at that bank (so the bank is really lending them 70% of the bank's money and 30% of the customer's own money). A computation of the real yield is over 22% APR (because the customer is paying interest on 100%, but only getting 70%). Using the same formula, a 20% compensating balance requirement yields almost 19% APR and a 10% compensating balance about 13.25% APR. With so much cash down, any advantages of a conventional loan quickly disappear.
In addition to the requirement to leave part of
the money in the bank, they also have covenants that require the customer
to maintain certain financial ratios. The bank has filed a
blanket lien against all of the customer's assets ("now and hereafter
acquired") and they are cross-collateralized with their kids'
accounts, personal accounts, and everything else in the bank.
Unless your corporation financial's stand on their own.
There is probably a clause in the loan agreement that says if at any time the bank feels uncomfortable with the industry the customer is in, they can call the loan - even if every payment has been made on time. There is probably another clause that says the rate will increase if the cost of money goes up. In short, the customer is now at the mercy of Federal Reserve.
Many people forget that banks are there to make a profit. The bank factors in deposits, commitment fees, etc. When you add up all their costs, Leasing is usually cheaper, less evasive and not as complex.
The point is, once again, that "rate" is not the only factor in making
a decision on how to finance a particular piece of equipment. You
have to compare the options vs. the costs .
BENEFITS OF LEASING
LEASING CONSERVES YOUR CASH
When you lease equipment, you are tying up less of your capital than if you would with a cash sale or bank financing that requires a large down payment and ties up other assets for the duration of your loan.
Cash is among the most valued commodities in business. (CASH IS KING) Whether applied to routine expenses such as rent and payroll or when used for investment opportunities such as adding new products, or new sales reps, or buying real estate, etc. there are many Uses for each conserved dollar .
Because of this loss of leverage, paying cash is often the most expensive way to acquire anything. Many businesses benefit from leasing. There are many reasons why a business might choose to lease their equipment.
Following is a list of the most common reasons to Lease:
- Leasing provides a method to acquire equipment that will often pay for itself: Increased productivity or reduced costs will often more than offset lease payments.
- Leasing frees up working capital in the business to earn a higher rate of return
- Leasing provides an additional source of credit.
- Leasing payments can have tax benefits
Tax benefits of leasing
- Leasing takes advantage of inflation. Instead of buying with today's dollars then depreciating equipment with tomorrow's eroded dollars, you reverse the process. You have the use of today's expensive equipment, but your payments are made in dollar that will have decreased in value.
- Leasing helps reduce obsolesce by keeping you current with technology.
- Leasing provide options: At the end of the lease, you decide what's best. Options range from returning the equipment, buying it or refreshing it.
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