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When faced with the need the purchase equipment and/or software for your business it is important to consider the impact of paying cash, taking a loan, or entering into an equipment lease. To assist with the decision making process, we have outlined some of the key terminology and side by side comparison of each solution.

Equipment Leasing versus Traditional Loans and Cash Purchases

Rate Structure Lease payments are fixed for the term of the lease Banks prefer to lend on a floating or variable basis thereby putting rate risk on the customer No impact other than the opportunity cost to reinvest funds in the customers� business
Softcosts Leases can incorporate 100% of transactional softcosts including training, shipping, and taxes Banks typically will not finance softcosts, hence these integral elements must be paid out of cashflow immediately An additional use of cash
Down Payment Leases are typically structured with first and last payment To minimize their risk, Banks often require 10% - 25% as a downpayment on equipment financing transactions 100% payment for equipment purchased is due between 0 and 30 days of delivery
Compensating Balances Not Required Most banks require minimum balances in order for clients to get the best rate. By having your funds tied up with virtually no return on this �investment�, compensating balances can dramatically inflate the actual cost/rate associated to the loan Not Required
Restrictive Covenants Not Required � Leases are underwritten based on the value of the asset being financed Bank loans are often secured with numberous restrictive covenants, such as the bank�s ability to demand early repayment, general security over all assets, maintenance of certain financial ratios, and restrictions on future debt to name a few. Not Required
Revolving Structure Leasing is fixed for the term of the lease Banks may classify a loan as revolving which gives them the ability to extend or cancel the loan on an annual basis. This classification may require clients to annually remit financial statements for the bank�s review and approval. From an accounting perspective, this classification may require clients to report the loan as a current liability thereby putting pressure on certain financial ratios Not Required
Security Filing Only equipment on lease is registered under the Personal Property Security Act Banks register a security interest in all of a company�s assets including inventory and receivables that are owned and acquired in future. This blanket security can negatively impact a company�s ability to borrow money in the future Not required however purchased assets become secured assets in favour of the bank if a General Security Agreement (GSA) is already in place
Application Process Leasing credit can often be extended with a simple one page application up to $30,000 The banking process can be intimidating and lengthy. Banks generally require a full review of financial statements Not Required
Tax Implications Depending on the structure selected, Leases may be 100% deductible as an operating expense A loan makes the end user the �owner� of equipment purchased which limits the tax advantage of financing to depreciation of the asset and interest expense tax advantage limited to depreciation of the asset over its useable life


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