| Leasing |
Bank Loan |
Cash Purchase |
| Fixed-term rental agreement with option to purchase. |
Arranging a Demand or Term loan. |
Using internally generated funds for acquisition of equipment. |
| Normally provides fast credit approval. |
Often involves a lengthy credit approval process. |
No credit investigation involved. |
| Usually requires no down payment. |
Usually requires a down payment of 20 - 25% or equipment cost. |
100% Initial cash outlay |
| No additional collateral required. Equipment being leased is normally the only security provided. |
Additional collateral is usually necessary. Normally a blanket lien on other business assets required. |
No requirements for collateral or security. |
| Delivery, installation and other soft costs often may be included in lease. |
Soft costs usually not included in loan. A further reduction of working capital. |
Soft costs are also paid from cash reserves. A further reduction of working capital. |
| Payment of sales tax is normally deferred and paid over the term of the lease agreement. |
Payment of full amount of sales taxes is due upon purchase. A further reduction of working capital. |
Payment of full amount of sales taxes is due upon purchase. A further reduction of working capital. |
| Conserves cash reserves and working capital. Funds remain available to invest in other areas of the business and earn greater returns. |
Conserves a portion of cash reserves and working capital for investment in other areas of the business. |
Reduces cash reserves and working capital. Cash paid is not available to invest in other opportunities and generate greater returns. |
| Credit lines and bank borrowing capacity remain unaffected. No restrictive covenants on future ability to borrow. |
Total lending exposure with the bank is increased. May exhaust operating credit lines. Likely to have covenants restricting future ability to borrow. |
Depleted cash reserves and reduced liquidity may affect future ability to borrow. |
| Monthly payments are fixed and predictable for the full duration of the agreement. |
Floating or variable bank rates are subject to change. Future costs and cash flow may not be predicted. |
No impact from future changes in prevailing interest rates. |
| The effects of inflation reduce the value of future payments, reducing the effective cost of the equipment. |
The effects of inflation reduce the value of future payments, reducing the effective cost of the equipment. |
No benefits from inflation. Full equipment cost is paid in present value dollars. |
| Lease payments may qualify as a tax deductible expense. This can reduce taxable income and reduce or defer taxes payable. |
Bank interest and capital cost allowance may qualify as a tax deductible expenses. This can reduce taxable income and reduce taxes payable. |
Entitled to capital cost allowance according to government schedules. No additional tax benefits. Slow amortization of original investment capital. |
| Simplifies capital budgeting and planned future replacement. Helps to avoid technological obsolescence. |
Complicates capital budgeting in a changing rate environment. No incentives to avoid technological obsolescence.
| May have a negative effect on capital budgeting. No incentives to avoid technological obsolescence. |
| No restrictive covenants. As long as payments are made, lessor will not reclaim the equipment or demand early payment of principal. |
Usually includes restrictions which will allow for the loan being called and the outstanding balance demanded in full. |
Equipment is owned. May still be subject to claim however if previous bank borrowing has been put in place. |
| Easy upgrades and no obligation to own the equipment at the end of the lease. Simplifies planning and budgeting for future upgrades. Often will not require reapplication for upgrade equipment values less than $50,000. |
Owned equipment is often kept longer than its optimum productive life. Will likely have to reapply to bank for the financing of future upgrades. |
Budgeting and planning discipline required to plan for future upgrades. Owned equipment is often kept longer than its optimum productive life. |
