By: GreatAmerica on November 2nd, 2022
What's the Difference Between a Lease and a Bank Loan?
Updated on 11/2/2022. Originally published 2/10/2019.
If you’ve ever bought a house, a car, or started a business, you likely have experience with bank loans. But what about leasing? As a business owner, you may be wondering about the difference between using a lease and using a bank loan for obtaining equipment. As a business owner, when do you use them? When should you offer them to your customers? We’ll walk you through the differences between these two acquisition options and provide resources for you and your customers to make the best decision when looking for new equipment.
A lease is best for something that depreciates quickly - like technology - and will not hold much value past the term.
One of the biggest differences between a lease and a bank loan is the credit underwriting process. Depending on the size of the lease or loan, different information and materials must be provided for the bank or financial services firm to approve or deny the transaction. More information is often required for a bank loan to be approved, like in-depth financial information or a full application, that can take time to process. Financing companies like GreatAmerica often only need basic business information that is available to the public to approve and work. Upon receiving your materials, we strive for a one hour turn time on most decisions.
Why Opt for Financing Over a Cash Purchase?
Before we continue exploring the differences between leases and loans, let's briefly address why you should consider financing over paying cash. If your customers need new hardware, software, upgrades, or add-ons, and they want to spend their available cash more effectively, financing is the answer. It protects their cash flow and helps keep them current on technology and equipment innovations.
Plus, as the solution and/or service provider, you benefit by adding monthly recurring revenue (MRR) with an equipment refresh timeline. Financing also allows for a stickier relationship with your customer.
What is a Lease?
While most leases have similar features, it’s important to know that not all leases are created equal. Their features will vary depending on the terms of the lease, the needs of the lessee and the lessor. However, here are some common features found in most leases:
- One fixed monthly payment
- Inclusive of soft costs (installation, training, and implementation)
- No advance payment or deposit required
- No impact on bank lines
- Easy to upgrade or add equipment throughout term
- Lease rates not tied to credit risks
- May avoid bank covenants
What is a Bank Loan?
Like a lease, bank loans have distinct characteristics. It’s important to understand these nuances to make the best recommendation for your customers. Here are some qualities that make a bank loan unique:
- Rates can fluctuate when tied to prime and economic factors
- Customer owns the equipment when loan is paid off
- Lines may be put on customer assets as collateral
- Tie up customer’s business credit line and limits
- May limit customer’s ability to borrow for other investments
- May require a down payment or deposit
- Tedious to upgrade or add additional equipment
- Can include a rigorous approval and underwriting process
- Customers with less established credit may face higher interest rates or loan denial
If ownership is an important factor for your customer, please note that there are lease options that offer ownership at the end of the lease term. Conditional sales and $1 Buyout leases are just two examples of leases that emphasize ownership. In both cases, when the customer makes the final payment at the end of term, they will own the equipment.
When Does a Bank Loan Make Sense for Your Customer?
A loan makes sense for customers who don’t need their bank lines for revenue-appreciating activities, such as personnel, marketing, etc.
The best way to determine the right option for your customer is to consider what’s driving their need to acquire equipment. Below are a few qualifying questions to ask your customer to determine the best fit for them:
- How long do you anticipate using the equipment or technology?
- Is this equipment or technology common and unchanging in your industry?
Note: They may need your help answering this question.
- Do you need working capital for other business needs or the capacity to add a new bank line?
When equipment or technologies don’t have frequent improvements and upgrades, ownership may be the answer. For example, common infrastructure like furniture or an office remodel may be best-suited to a bank loan or line of credit when cash is not an option.
Doing What’s Best for Your Customer
Both leasing and loaning are wallet-friendly options for acquiring equipment and technology. Yet, there are more distinctions between the two than you’d expect. When your customers instinctively say they don’t need to lease because they can use a bank loan instead, or they don't need to finance because they have cash, you can highlight some of the differences and benefits to them to ensure their success.
By using a lease, your customer can invest cash and credit into other areas of their business. They maintain a consistent interest rate with no down payment, can easily upgrade to include additional equipment, and avoid investing in quickly evolving equipment.
Ultimately, equipment leases and bank loans help your customer obtain the equipment their business needs. The ability to pay overtime is much more approachable than committing to a large, upfront cost. Maintaining working capital, hedging against inflation, and forecasting with ease are the cherries on top. Check out this PDF to learn more about the differences between leases, loans, and cash.
GreatAmerica is the largest independent, family-owned national commercial equipment finance company in the U.S. and is dedicated to helping manufacturers, vendors, and dealers be more successful and keep their customers for a lifetime. GreatAmerica was established in Cedar Rapids, Iowa in 1992 and now has offices in Iowa, Georgia, Minnesota, and Illinois. In addition to financing, GreatAmerica offers innovative non-financial services to help our customers grow.