Doing a loan versus lease review is important because you will know which is the better option for your business.
When you are setting up a business, you need a lot of capital for equipment and other start up necessities. You have the option of getting a loan from a bank to buy the equipment and paying later when you start making profits. On the other hand, you can lease the equipment using a step up lease. The latter option allows you to use the equipment without making any payments until after your business starts getting profits. Getting banks to finance your business equipment is not such a good idea if you consider a couple of things.
Loan Versus Lease Review
Banks Have High Start Up Demands
Before getting a loan to purchase equipment, the bank will need a lot of assurance on your ability to pay. They will do thorough credit checks referencing other financial lending institutions. If you have not borrowed before or have poor credit scores you chances of getting financed will be low. In addition, they might have very high down payment percentages. If you are not able to come up with this, then you will probably not qualify for the loan.
Therefore, when you are starting up without a lot of capital getting bank loans may not be the best option. They tie up your money and make it difficult to invest in other things. Getting start up equipment with the help of a bank increases your debt ratio. Accessing additional loans will be hard unless you get another bank to buy out the previous one. This will make it difficult for you to expand your business until you clear the loan.
You have to invest a lot when you are getting financing from a bank. For start ups, such significant investments may not be possible. Conversely, leasing allows you to get the most returns out of equipment without investing a lot. The amount of revenue obtained from using the device is enough to cover the lease payments. So, you do not have to use any of your own money to finance the lease.
When you are getting loans for purchasing appliances from a bank, you spend a lot more in the end. They have other banking charges that you will have to foot to access loans. This means you will pay a lot more than the equipment is worth.
Banks interest rates are rarely fixed. You cannot be sure how much you will be paying in the installments. The amount could go up and cost your business a lot. However, when you are leasing, the payments remain the same regardless of prevailing market rates. Consequently, planning for your business future is easier when you take a lease instead of a bank loan.
When you take a lease, you benefit a lot from tax deductions. This is due to the fact that your lease payments are considered as an ongoing cost of running the business. However, when you get bank loans, the principle amount is not deductible. This means you have high tax payments which increases the costs of running your business.
When you lease equipment, the company normally covers installation costs. This means you do not pay anything more apart from the payments agreed up on. On the other hand, when you get a bank loan, you will have to cover these additional installation and maintenance costs.
Difficult To Opt Out
In the current modern world, technology is always changing. There is always something new and better on the market. In order to be ahead of the competition, you need to keep up with the changing technology. If you are on a lease, you can easily terminate it and get modern appliances. You may have to pay a small early termination fee. Since you do not own the piece of equipment, all you have to do is surrender it back to the company.
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If you get a bank loan, you buy the equipment and become the owner. To change to another one, you will have to look for a buyer and probably sell it at a loss. If it is a machine that not many people use, getting a buyer will be hard and you may be stuck with it. Therefore, getting rid of it will not be as easy. If you want to stop making payments to the bank, you will need to pay the entire balance along with the early termination penalty.
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