Recently, many business owners are re-evaluating equipment bank loans vs equipment leases. With the Fed aggressively hiking interest rates in the last 3 months, an equipment loan might not be the best financial solution in the current market. We have compiled a rough comparison to help business owners make an informed decision.
EQUIPMENT BANK LOANS
- Allow flexibility of an early payoff. A four or five year loan can be paid off with typically no prepayment penalty. Principle left on contract is what is owed.
- Generally have blanket lien language, meaning the bank has title to both the equipment and other business assets in case of default.
- Typically require larger down payments to help the bank mitigate their risks. Requiring 10-20% down is not uncommon. In some cases, the bank may require minimum bank balances or the purchase of CDs. This lets the bank hold more of your capital as collateral on the loan.
- Some larger loans are subject to financial reviews. Be careful of “callable loans” as these allow the bank to demand full payment of the loan if certain conditions aren’t met. Years ago, we had a customer go out of business because their local bank called their note. They lost their building and their equipment because they couldn’t get the bank repaid in the banks required timeline.
- Have fixed payments over the term with no benefit to early payoff as payments left on the contract factor in the buyout. During an inflationary environment, prepaying fixed payments does not make financial sense.
- Only collateral tied to the equipment lease is a UCC Filing on the equipment. This gives the borrower flexibility in expanding since they are protecting their other business assets.
- Only 1 or 2 advance payments are standard upfront deposit.
With the recent Fed hikes, there are a few additional things to be considered when considering between bank loans or equipment leases. Many customers are finding monthly payments are in many cases lower than comparable bank loans. The application to approval process has also changed dramatically in the last 3 months banks are taking a longer time to review transactions from a few days to over a week, in contrast equipment leases are typically approved within hours and funded within days.
As you consider your next equipment acquisition, and considering the current market environment, looking at an equipment lease could be a better long term financial decision for your business. As with any financing decision, it is important to compare your options and speak with reliable lenders whom specialize in these areas.