What are the differences in a loan vs. lease? Loans and lease financing are both popular methods of funding, but there is a key distinction between the two. A loan is the borrowing of money while a lease is a term rental agreement for the use of specific equipment. As a means of financing, loans and leases have different benefits. Understanding the differences between a loan and lease financing can help you decide on the best option for your business needs. Below are some major considerations to consider.
Rates
Loan: Rates are usually floating and based on Prime Rate or another index such as LIBOR. As the index fluctuates so does the monthly payment. This is beneficial during periods of falling interest rates, and detrimental when interest rates rise.
VS.
Lease: Unless the lease has special provisions, payments are generally fixed for the term of the lease. Fixed payments make budgeting and cash flow management much easier.
Amount Financed
Loan: Banks generally lend a portion (60%-80%) of the equipment or vehicle cost; exclusive of soft costs such as shipping, training, installation, etc.
VS.
Lease: Up to 100% financing is available including soft costs and sales tax. Out-of-pocket costs are usually limited to the first month’s investment or a small security deposit.
Extra Costs
Loan: Banks use fees to boost their rates of return on loans. Includes application fees, origination fees, commitment fees, schedule fees, funding fees and charged for expenses associated with approving and executing the loan application.
VS.
Lease: In 99% of small-ticket equipment leases (up to $75,000), there are no origination, commitment or application fees. Depending on the transaction size, documentation fees are minimal, ranging from $195 to $295
Available Terms
Loan: Banks tend to be less flexible than leasing companies. That is good if you are looking for a standard term but not so good if you need flexibility.
VS.
Lease: In most cases you choose the terms, the purchase option, and the down payment of your equipment lease. We offer 60-month terms on most equipment and up to 84 months on some asset classes. Custom terms such as Seasonal, Deferred, or Step payments can easily be arranged. We can also structure contracts to meet any Capital or Operating Budget restrictions.
Equipment Types
Loan: Banks will not finance equipment they do not understand or feel has limited collateral value.
VS.
Lease: Our internal funding capability ensures we can finance for most equipment types.
Ease of application
Loan: Regardless of the amount requested, most banks will not begin to review your credit until you supply a full financial package.
VS.
Lease: Our business is convenient. We are service oriented. We offer lease programs up to $100,000 without financials. Odds are we can approve your equipment lease with just our simple application.
Speed
Loan: Banks are slow credit decision makers. It can take weeks to prepare your request and bring it to the credit committee for review.
VS.
Lease: More than half of our approvals are issued the same or next day.
Collateral
Loan: Banks usually secure their loans by requiring additional collateral such as real estate, equipment, inventory, receivables or your house. In fact, it is common practice for banks to file a blanket lien against all current and future assets of your company.
VS.
Lease: In most instances, the only collateral is the equipment being leased.
Restrictive Covenants
Loan: Bank loans often require the borrower maintain certain minimum financial ratios and report them to the bank on a quarterly or semi-annual basis. If the borrower fails to maintain those ratios the bank can call the loan. They can also place restrictions on or limit future borrowings from any institution.
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Lease: Generally there are no such restrictive covenants.
Madison Capital is a member of the following commercial finance associations
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Orbital Energy Services Corp. (Lessee)
“Friendly, considerate, timely and professional are a few of the reasons we financed several of our major equipment purchases with Madison Capital. They have a simple yet advantageous deal structure that makes our acquisitions easy and financially prudent. We will continue to incorporate Madison Capital as part of our financing partners.”
Roy Watson Chief Financial Officer, Orbital Energy Services Corp.
Pro Dental Sales and Services (Vendor)
“We have been working with Madison Capital for a long period of time and Mrs. Pistorio and her staff are the best. Their response is very fast and they have excellent customer service. We highly recommend them.”
Jose Perez Trias President, Pro Dental Sales and Services
Elias Wilf Corp. (Lessee)
“Working with the Madison Capital team for many years has been seamless and enjoyable. While they have been providing financing for our personal vehicle needs, we have developed a very meaningful and beneficial relationship over the years.”
"If someone were to ask me, the owner of a chauffeured transportation company, what one attribute I regard most in a financial services company, I would answer: knowlege of my business."
“We have worked with Madison Capital for over 15 years. They are our only leasing company. Both Allan and Nancy are extremely responsive to our needs and have always been able to help us out at the snap of our fingers. They understand financing of large construction equipment and have really enabled us to make some smart purchases to increase our effectiveness. They just get it done!”
