Leasing –versus- Bank Loan –versus- Cash

Leasing programs can be a common-sense complement to an existing bank relationship. Cash or working capital may be the ideal way to meet daily and short-term business needs, such as paying suppliers, meeting a payroll, or dealing with a business emergency. But working capital isn’t ideal for funding longer-term assets like equipment. Take a look:

 Leasing
Non-cancelable contract extending over a fixed term

Advantages
100% financing, including installation, wiring, taxes, and software
Conserves capital
Preserves bank lines
Flexible terms
Hedge against inflation
Obsolescence protection
Fixed lease term and payments
Full use of equipment without ownership
Creates new credit source
Easy add-on / upgrade

Disadvantages
Non-cancelable agreement

Bank Loan
Repaid in regular installments

Advantages
Direct ownership
Depreciation
Appropriate when bank lines remain untapped or there is a loan covenant requirement

Disadvantages
Capitalizes equipment
Relatively short term, usually 24 or 36 months
Extensive documentation
Covenant restrictions
Exhausts credit lines
No obsolescence protection
May require compensating balances (usually 20% or more of the loan amount), down payment, and/or origination fee
Variable interest rate could rise

Cash Purchase
Use working capital for acquisition

Advantages
No finance charges
Direct ownership
Depreciation

Disadvantages
Depletes cash reserves
Reduces investment leverage
No hedge against inflation
No obsolescence protection

Be sure to consult with your own accountants or tax advisors regarding the tax consequences of leasing and financing transactions.

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