Below is a variety of leasing terminology that is important to be familiar with when deciding whether you should apply for a Bank Loan or an Equipment Lease.
General Security Agreement (GSA)
Often, when you secure a Bank Loan, the Bank takes a Blanket Lien on all of your company's assets, (assets currently owned or future acquisitions), by filing with your provinical Personal Property Registry. What this basically means is that the bank has now tied up all of your assets, including receivables and inventory. Conversely, a lease only requires filing a Personal Property Registry statement on the equipment being leased.
Credit Review and Disclosure
Generally speaking, applying for a Bank Loan can take a lot of time and usually requires a full financial disclosure, including both corporate and personal tax returns, credit bureaus and financial statements. The approval process can be very lengthy as they decide your credit worthiness. With an equipment lease, an approval can usually be obtained from a simple Commercial Application in generally less then 48 hours.
Banks typically require an equity position of some kind that can run up to 20% and beyond. Most times, an equipment lease can encompass 100% of the total cost of goods, foregoing any down payment, thus protecting your cash flow. However, a lease will generally include a first and last payment in advance.
Banks tend to loan long-term money on a floating or variable rate tied to prime. This translates to variable loan payments that may not fit into your budget at any given time. Lease rates are also tied to bond rates that flucuate, however, once a lease is written and executed, the monthly payments remain fixed for the duration of the lease.
Most Commerical Bank loans include Restrictive Covenants, restrictions such as amount of future debt, shareholders loans, and maintaining specificed financial ratios ie, debt/equity ratio, working capital ratio and tangible net worth ratio. Leasing does not include any such restrictions and therefore leases can not be cancelled if any of your business ratios change during the lease term. This is not so of a bank loan.
Bank Loans require that you keep a depreciation allowance schedule on the asset(s), meaning you own the equipment and are required to capitalize it on your balance sheet. The asset is then ammortized over the life of the asset where your only tax advantage is depreciation and the declining interest on the loan. A lease, however, does not require you to keep a depreciation schedule, because the equipment is not owned until after the final lease payment or buyout option. Therefore, the entire payment is an expense, resulting in a much greater tax advantage over the term of the lease.
Contact us online or call 1-800-392-9005 now for a tailored quote.