What are the
Differences Between a Lease and a Loan?
Loan: A
loan requires the end user to invest a down payment in the equipment. The loan
finances the remaining amount.
Lease: A lease requires no down payment
and finances only the value of the equipment expected to be depleted during the
lease term. The lessee usually has an option to buy the equipment for its
remaining value at lease end.
Loan: A loan usually requires the
borrower to pledge other assets for collateral.
Lease: The leased
equipment itself is usually all that is needed to secure a lease
transaction.
Loan: The end user bears all the risk of equipment
devaluation because of new technology.
Lease: The end user transfers
all risk of obsolescence to the lessors as there is no obligations to own
equipment at the end of the lease.
Loan: End users may claim tax
deduction for a portion of the loan payment as interest and for depreciation
which is tied to IRS depreciation schedules.
Lease: When leases are
structured as true leases, the end user may claim the entire lease payment as a
tax deduction. The equipment write-off is tied to the lease term, which can be
shorter than IRS depreciation schedules, resulting in larger tax deductions each
year. The deduction is also the same every year, which simplifies budgeting
(Equipment financed with a conditional sale lease is treated the same as owned
equipment).
Loan: Financial Accounting Standards require owned
equipment to appear as an asset with a corresponding liability on the balance
sheet.
Lease: Leased assets are expensed when the lease is an
operating lease. Such assets do not appear on the balance sheet, which can
improve financial ratios.
Loan: A larger portion of the financial
obligation is paid in today's more expensive dollar.
Lease: More of
the cash flow, especially the option to purchase the equipment, occurs later in
the lease term when inflation makes the dollar cheaper.
Leases also take
into account that the equipment is worth something at the end of the lease term.
This is called its residual. Residuals are built into the lease pricing, usually
making the lease payments lower than a loan. To compare lease products, it is
better to compare monthly payments than to try to compare loan interest rates
with lease rates. On a cost-of-capital basis, leasing is often the most cost
effective option.
Designing A
Lease
Once you've completed your evaluation and
decided to lease your next equipment or technology acquisition, the first step
is to select the type of lease that fits your business needs.
There are several
different types of leases. We would consider these factors in determining which
lease is best for you:
- How long you want to use
the equipment or technology?
- What you intend to do with
the equipment or technology at the end of your lease?
- What is your tax
situation?
- What is your cash flow
situation?
- What are your company's
needs for future growth?
You also will
need to determine what happens at the end of the lease. Your options can include
returning the product, purchasing the product at fair market value or a fixed
price, or renewing your lease. We will guide you through these options and
address any questions or concerns you have.
The Benefits
of Leasing
You rely on equipment and technology
every day to operate and grow your business. But the value of those products
comes from using them, not owning them.
By leasing, you
transfer the uncertainties and risks of equipment ownership to the leasing
company, which allows you to concentrate on using that equipment as a productive
part of your business.
Leasing offers
numerous advantages over other financing methods:
Retain Capital
Strength: Leasing allows you to purchase the equipment and technology you
need today while spreading your payments affordably across time. This allows you
to reserve your capital for other day-to-day expenses. In addition, because a
lease is not considered a long-term debt or liability, it does not appear as
debt on your financial statement, thus making you more attractive to traditional
lenders when you need them.
Speed: Leasing allows you to respond quickly as your need for equipment and
technology arises. You can be approved for a lease within hours through minimal
documentation and you can have the products you need soon after.
Flexibility: As your business grows and your needs change, you can
add to or upgrade your lease at any point through add-on leases or master
leases. If you anticipate growth, be sure to negotiate that option when you
structure your lease program. You also have the option to include installation,
maintenance and other services, if needed.
Avoid
obsolescence: Leasing is an extremely attractive option for all your
computer hardware and software purchases because technology becomes outdated
very quickly. With a lease, your risk of getting caught with obsolete technology
is lower because you can build upgrades and add-ons into the lease.
Customized
solutions: Leasing allows you to structure a financing program that
addresses your key business issues, including: cash flow, budget, transaction,
and cyclical fluctuations. For example, some businesses request seasonal leases,
which allow them to schedule their payments during their busiest
months.
Tax
advantages: The IRS does not consider an operating lease to be a purchase,
but rather a tax-deductible overhead expense. Therefore, you can deduct the
lease payments from your corporate income. Consult your tax advisor about your
specific situation.
Asset
management: A lease provides the use of equipment for specific periods of
time at fixed payments. It assumes and manages the risk of equipment ownership.
At the end of the lease, the lessor may dispose of the equipment.
Is Direct
Lease the Right Choice for your Business?
Your choice
of a financing company is an important one. You need a company that can meet
your financial and strategic objectives and ensure that you get the best
possible leasing solution.
The key to
success is to select a financing partner you are comfortable with. If all goes
well, your leasing company will be with you for a long time, so the choice is an
important one. Pricing is always a factor, but the relationship should be a
primary consideration.
As an Inc. 500
company, we have successfully guided thousands of businesses, from sole
proprietors to publicly traded companies, in today's competitive national and
global markets by providing innovative financing solutions for all types of
equipment and technology purchases. Our solutions create business growth,
preserve crucial working capital, and leverage key tax benefits. And, most
importantly, our solutions fit the needs of each individual business.
We are well
versed in developing financing strategies for all types of equipment and
technology. We can help you upgrade your computers, network equipment, servers,
Web hardware, peripherals, and more.
We can provide
strategies to help you acquire all types of vehicles and equipment, including
industrial, construction, medical, telecommunications, and production equipment.
And while we can help you achieve success in all these areas, we also partner
with major corporations to pass on generous discounts and industry expertise to
our members.
Most importantly,
Direct Lease will provide you with lightning-fast turnaround on all of your
transactions, highly competitive rates and service that is unseen in the
financial industry. We're friendly. And we're a partner.
And speaking of
partners, that's exactly what your Direct Lease Account Executive becomes. Each
is trained and experienced in guiding you through your financing options and
helping you understand how financing can help you achieve cash flow, capital
expansion, tax issues and balance sheet goals.
Isn't that what
you really need from a financial partner?
You bet it is. Let's get
started today!
