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Leases vs. Bank Loans | Northern BC Business

Leases vs. Bank Loans

When does leasing make more sense for my business?

When considering leasing as a financing option, decision makers must first determine if future profits depend on (a) owning the equipment or (b) using the equipment. For instance, owning an asset might be preferred financing option for items that appreciate in value. Real Estate is the best example that comes to mind.

Most assets, depreciate in value. Commonly financed items such as furniture, fixtures and equipment depreciate fairly rapidly. For items that depreciate rapidly, it’s the “use” of the depreciating asset that can help the bottom line. The objective, then, is to maximize the use and minimize the investment.

What about leases and taxation?

Businesses in Canada and the United States will be able to write off most, if not all, their leasing expense within the same tax year. Alternatively, equipment purchased via bank financing must be written off in accordance to the depreciation schedules your company or your accounting firm has in place. Often, this means that equipment must be depreciated over a period of 5 – 7 years, or more! Operating leases can effectively accelerate those write-offs even faster, putting cash into your pocket sooner.

Leasing is a Complete Solution

When leasing, as much as 110% of the equipment cost can be financed allowing you to cover the principle equipment cost plus other soft costs such as delivery and installation. Upon credit approval, typical leases require only two payments up front. The lease is secured via a single UCC filing against ONLY the equipment being leased. After that, you won’t hear from the leasing company for the next 3-5 years as long as you make your payments. At the end of that time you can (a) just return the equipment with no further obligation; or (b) lease/upgrade to new equipment. Alternatively, you can buy the equipment outright for the price quoted in the end-of-term option ($1.00, 10% purchase option, or fair market value). In the end, you will have fully expensed your
financing payments for tax purposes – unlike a term loan or credit line.

Is that “Prime Rate” offer a good deal?

There isn’t a single prime rate. Each bank is free to establish their own “prime” rate which is based on the “prime rate” published by the Bank of Canada or the US Federal Reserve. While we’ve often seen individual bank’s approve loans “at prime” to their best customers, the typical loan
rate can be as much as 4 points above the benchmark published rate.

Let’s talk rates – is it 7% or 17%?

Obtaining a bank loan at “low” rate often requires that you keep 20-30% of the loan amount on deposit in a non-interest bearing account at that bank. Using this math, the bank is really only lending you 80% of their money – the rest is yours.

Don’t be afraid to ask questions. Let’s say that the prime rate is 5.5% and your bank has offered you a loan for “prime plus 1.5 points”. It sounds good but the deal could come with strings that bump the real yield to 17% as the low-interest rate may require you to keep a compensating (minimum balance) balance on deposit, up to 20% of the loan value. In short, your interest rate is low but you’ll end up paying interest on 100% of the loan value while only being able to access 80% of the loaned money. The compensating balance is never expressed as part of the interest rate quotation. Even if the loan is conditional on maintain a 10% compensating balance, the effective interest rate is 11.7% – not 17% for sure, but a far cry from 7%.

Sure, some companies may choose to keep $10k – $20k on deposit in a chequing account but the difference here is that loans with a compensating balance clause make the deposit amount a condition of the loan. That same $10-$20k is now required – fall below the threshold amount and you could be in default. It’s all in the fine print.

Jim Woods is the Senior Vice President of Mosaic International Corporation – equipment lease financing specialists headquartered in International Falls, Minnesota. As a region where a number of equipment vendors compete to offer affordable financing options available to their prospects, we appreciate Jim’s input on equipment leasing and financing. Mosaic’s market specialties are in commercial, government and native leasing markets in both Canada and the United States.
Mosaic Leasing
web: www.mosaicleasing.com
tel: 218-285-7421 ext.130


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Posted by on 10:39 am. Filed under Business Advice, North Central, North Coast, North East, North West, US Business. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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