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Loan |
Lease |
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A loan requires the end user to invest a
down payment in the equipment. Frequently,
the down payment can be as much as 20% of
the original equipment cost. The loan
finances the remaining amount. |
An operating lease generally requires no
down payment and finances only the value of
the equipment expected to be depleted during
the lease term. The lessee usually has an
option to buy the equipment for its
remaining value at the end of the lease. |
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A loan usually requires the borrower to
pledge other assets for collateral. |
The leased equipment itself is usually all
that is needed to secure a lease
transaction. |
|
A loan usually requires two expenditures
during the first payment period; a down
payment at the beginning and a loan payment
at the end. |
A lease requires only a lease payment at the
beginning of the first payment period which
is usually much lower than the down payment. |
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The end user bears all the risk of equipment
devaluation because of new technology. |
The end user transfers all risk of
obsolescence to the lessor as there is no
obligation to own equipment at the end of
the lease. |
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End users may claim a tax deduction for a
portion of the loan payment as interest and
for depreciation, which is tied to IRS
depreciation schedules. |
When leases are structured as a tax 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 every year, which simplifies
budgeting (equipment financed with a
conditional sale lease is treated the same
as owned equipment.) |
|
Financial Accounting Standards require owned
equipment to appear as an asset with a
corresponding liability on the balance
sheet. |
Leased assets are expensed when the lease is
an operating lease. Such assets do not
appear on the balance sheet, which can
improve financial ratios. |
|
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. |
