Compare Leasing with Other Payment Options |
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Question |
Lease |
Loan/Credit
Line |
Cash |
|
| What can you finance? | You can finance 100% of the cost of the equipment plus “soft” costs (i.e. sales tax, installation, delivery, training, etc.). | Banks usually will not finance “soft” costs and no more than 80% of the actual equipment cost | Anything. You are paying with after-tax dollars (vs. pre-tax with lease). | |
| How difficult is it to get financing? | One page credit application (no financials) for transactions under $75,000 (up to $150,000 for our multi-physician medical program). All others require standard financial statements. | Banks require full financials for all transactions. Can be more difficult for “closely” held companies. | Easy. But once you use it, your cash is no longer available. | |
| What will your total costs be for the product and how much will you have to pay at date of purchase? | Low up front cost – usually only two payments (first & last). Manageable monthly lease payment. | Typically at least a 20% down payment. In addition, you will need to pay: installation, delivery, sales tax, etc. | Total due. You are paying with after-tax dollars (vs. pre-tax with lease). | |
| What are your payment structure options? | 1 - 6 yr lease terms available. Buyout options: FMV (Fair Market Value), 10%, or $1. You can have flexible payment plans based on the business, i.e. graduated, step-up, deferred, skip, and seasonal payments. | Banks may restrict to shorter terms, usually 2-3 years. This could result in higher monthly costs then revenue produced for equipment. Loans and Lines of Credit can be tied to prime, causing in-consistent payments. | Total due. You are paying with after-tax dollars (vs. pre-tax with lease). | |
| How will it affect your cash flow? | Low up front costs and low monthly payments. Keeps working capital available for the business. | Large down payment often due. Shorter terms = larger monthly payments. | Cash flow may be depleted by large up front payment. Internal rate of capital is about 12%. | |
| What are the tax advantages? | 100% write-off of the entire payment when structured to meet IRS Rulings. | Can only write off interest portion of loan. Principal is depreciated on standard depreciation schedule (usually takes longer). | Paying with after-tax dollars. Item is depreciated on standard depreciation schedule (usually takes longer). | |
| What about the concern of obsolescence? | You have the option not to keep the equipment at the end of term. | You own the equipment at the end of payment regardless if it has become outdated. | You own the equipment at the end of payment regardless if it has become outdated. | |
| Overall comparison | Low up front cost, possible to pay with pre-tax dollars, retain capital strength, upgrade options, quick application process (financials only needed for larger deals), fixed payments. | Credit lines are “on-demand” loans and should be kept for emergencies. Not wise to invest in depreciating assets. Difficult to set credit line up and once it is gone - its gone. | Not a good option - want to keep as much money for working capital as possible. Not wise to invest in depreciating assets. | |
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