The Difference Between A Lease And A Loan
Navigating the world of business financing can be challenging, especially if you’re dealing with bad credit. Below, we provide a clear comparison between leasing and loan options to help you make an informed decision. Each option has its own benefits and considerations, and understanding these differences is crucial in choosing the right path for your business needs. Take a look at the table below to see how leasing and loans differ and determine which option best suits your situation.
| LEASING | BANK FINANCING | |
| Interest Rates | Fixed Rate / Fixed Payments | Usually an adjustable rate |
| Term | Up to 5 years on all equipment over $2,500 | Usually 2-3 yr. |
| Down Payment | 100% Financing | Typically 20% - 30% of total cost |
| Financial Statement | Not mandatory for transactions up to $150,000, used for customers wishing to submit financial, and financial are not required annually after approval | Required on almost all transactions over $10,000, and bank usually requires annual updates to maintain loan |
| Financial Reporting | Not required to be reflected on balance sheet as debt | Carried on balance sheet as debt |
| Sales Tax | Financed with monthly payment | Must be paid in advance |
| Hidden Requirements | None- UCC filling & processing fee only at lease execution, no lease termination costs | Compensating balances, other bank charges, loan covenants |
| Tax Benefits | Usually 100% deductible over the term of the lease | Depreciated over the IRS's useful life of the equipment |
| Effective Cost | Lower than bank financing due to tax benefits, lower down payment, longer lease term and no requirement for compensating balances | Higher cost due to longer depreciation schedule, larger down payment, adjustable interest rate, and other hidden charges |
| Opportunity Cost | Frees bank lines and cash allowing you to invest further in your business | Ties up bank lines possibly preventing opportunities to expand your business |
