Lease/Loan Comparison


Payment Terms

Borrower repays advance of funds with interest over a specific period of time. Leases involve the payment of rent.

Terms of Ownership of Equipment

Borrower holds legal title to the equipment.

Lender has no expectation of return of the equipment and has no residual value at risk at the end of the term of the conditional sale transaction.

A loan does not alter borrower's full ownership of the equipment at the end of the loan term in the absence of any default.
Lessee may have a right to purchase the equipment at the end of the lease or during the lease term, but the lessor generally holds legal title to the equipment.

In a true lease, the lessor retains significant residual value, and tax advantages, and the lessee may return the equipment at the end of the lease term. This reduces the rent payment considerably below the cash requirement of a conditional sales contract.

A lease with a Fair Market Value purchase option allows the lessee 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 remaining cost of the equipment. None. A true lease finances 100 percent of the value of the equipment expected to be used during the lease term. A lease requires only a lease payment at the beginning of the first payment period which is usually much lower than the down payment.

Payment Scheduling

Loan payments are made in arrears of each loan period. Lease payments may be made in advance or in arrears of each leasing period.

Collateral Requirements

Depending on the credit worthiness of the customer, a business loan may require the customer to pledge current or fixed assets for collateral. A non-recourse loan, however, limits the customers liability to the equipment and related cash flows, insurance and certain indemnity payments. Equipment can be seized in event of default. Leased equipment usually serves as the collateral needed to secure the transaction.

Depreciation Allowance

Borrowers/owners may claim a tax deduction for a portion of the loan payment as interest and for depreciation which is tied to IRS depreciation schedules. In a true lease, the end user may claim the entire lease payment as a tax deduction. The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year. The deduction is also the same each year, simplifying budgeting. However, equipment financed under a conditional sale lease is treated the same as owned equipment.

Obsolescence Risk

The borrower/owner bears the risk of equipment obsolescence and devaluation, due to development of new technology. The lessee transfers risk of equipment obsolescence to the leasing company, since no obligation exists to own the equipment at lease end. Some leases contain provisions for upgrading equipment during the lease term for additional rent.

Assets Eligible to Borrow Against/Finance

Loans can be used to pay for a broad array of capital needs, including sales finance, inventory finance and business expansion. Leases tend to finance items of equipment, software and services. A "Master Lease" acts as an umbrella for the financing of multiple deliveries of equipment represented and documented by schedules to the Master Lease.

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 term when inflation makes dollars cheaper.