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Loan Versus Lease


LOAN LEASE
     

Payment Terms

Your company repays the principal amount of the loan plus interest over a specific period of time.

Your company pays a monthly rental fee over a predetermined period of time.

     

Ownership of the Equipment

Your company holds the legal title to the equipment.

Once the loan has been fully repaid, your company retains full and complete ownership of the equipment.  The Lender usually will not take possession of the equipment at the end of the loan term unless a default has occurred. 

Ownership of the equipment for most leases is BROADCASTLease, but your company most likely can negotiate the purchase of the equipment at the end of or during the lease term if you so choose.

In a true lease, BROADCASTLease retains significant ownership, and tax advantages, however, your company has the option to return the equipment at the end of the lease. This reduces the monthly rent payment considerably below the cash requirement of a loan.

A Fair Market lease with a purchase option allows your company to return the equipment without further obligation when the lease ends or purchase the equipment at its fair market value or other agreed price.

 

Down Payment Requirements

An equipment loan usually requires a down-payment and finances the balance.

None. A true lease finances 100 percent of the value of the equipment.  A lease requires only the first and sometimes the last payment at the beginning of the lease which is usually significantly lower than the down payment.

 

Payment Scheduling

Loan payments are usually made in monthly increments and are applied to the interest first and then the balance is used to reduce the principal amount.  Most loans allow pre-payment.

Lease payments are usually monthly and do not affect the principal reduction or interest to be charged.

 

Collateral Requirements

Depending on your credit history and worthiness, a loan may require you to pledge current or fixed business or personal assets as collateral. A non-recourse loan, however, limits your liability and related cash flows, insurance and certain indemnity payments. In the event of a default, the Leased Equipment and the assets put up as collateral can be seized.

Leased equipment is usually accepted as the collateral needed to secure the Lease.  For start ups, some additional collateral may be required.

In the event of default, the leased equipment must be returned to BROADCASTLease.

     

Depreciation Allowance

Your company can claim a tax deduction for the interest portion of the loan payment and depreciation expense of the asset, based on IRS schedules.

For most leases, your company may take the entire lease payment as a tax deduction. This allows you to effectively depreciate the equipment at a faster rate than IRS depreciation schedules, resulting in a larger tax deduction each year. The deduction is also the same each year, simplifying budgeting.

Risk of Obsolescence

Because your company has to pay the loan no matter what, you are always at risk of the equipment becoming obsolete or experience excessive devaluation, due to new technology.

The burden of obsolete equipment becomes that of BROADCASTLease Your company has no obligation to own the equipment at the end of the lease. Some leases allow for the upgrading of equipment during the lease term but may result in an increase in the amount of the lease payments.

 

Use of a Loan or Lease

The cash from a loan can be used for any purpose, including receivable financing, inventory, expansion, etc.  A loan can also be short term or long term.

Leases are used exclusively to finance equipment, including software.  Using a lease for the equipment may free up existing cash flows to finance other business needs.

 

Inflation Impact

A larger portion of the financial obligation is paid in today's more expensive dollars.

More of the cash flow, especially the option to purchase the equipment, occurs later in the lease when inflation makes dollars cheaper.

     

Your Accountant

It is best to confer with your Accountant to determine whether a loan or lease is best for your company.  We are always available to offer advice and provide data.