Hospitality Leasing Corporation

Why Lease?

Why Lease?

Lease Vs. Bank Loan

The first consideration for most executives when deciding which type of financing makes more sense is evaluating the objective of the transaction. Is it owning the equipment or using it that will be the source of future profits to the business?

It is generally accepted that owning business assets is particularly beneficial when those assets appreciate in value (real estate being a prime example). Most assets like FF&E, computers, mini-bars, safes, door locks, etc. only depreciate in value, in most cases fairly rapidly. When the objective is getting maximum use out of a rapidly depreciation asset, it is that “use” that brings profits to the business, not the “appreciation” of the asset itself. Therefore make sure you maximize the use and minimize the investment .

If you normally finance your investments using bank loans you are probably well familiar of the fact that most banks will not lend you 100% of the equipment cost. Normal banking lending rules require the customer to pay up to 30% of the equipments cost cash. On top of the required "down payment, many banks also require that the customer keeps between 20% to 30% of the loan amount in non-interest bearing, "compensating balance" accounts at that bank.

It is also very important to note that the down payment required by the bank has to be paid by using the company's cash reserves or through a loan from the owner / parent company. In any event, the expected ROI (Return on Investment) on the cash down payment will be carrying an expected 15% to 20% APR (Annual Percentage Rate).

When considering all of the above, the "great rate" you negotiated with your bank, (e.g. Prime + 2 points) suddenly carry an effective APR of 10%, 15% or even 25%. You have also used up available credit, both from the bank and from your owner or your own operation, limiting you ability address upcoming opportunities / challenges.

If instead you had leased the investment, the lease payment would have been based on a fixed interest rate for the term of the agreement with no exposure to raising prime rates. Also, most businesses will write off 100% of their lease payments. Bank loans for equipment must be capitalized and only gradually depreciated over a period of 5, 6, 7 or more years.

Monthly Payment

A.P.R

Total Payments

3 Year Capital Lease

$4,597.63

6.89%

$165,514.54

5 Year Capital Lease

$2,990.44

7.55%

$179,426.56

3 Year FMV Lease

$4,036.43

-2.16%

$145,311.56

5 Year FMV Lease

$2,682.55

2.91%

$160,953.22

7 Year Bank Loan

$2,529.51

10.51%

$212,478.65

10 Year Bank Loan

$2,038.65

10.67%

$244,637.83

* FMV stands for Fair Market Value, which is the Purchase Option for this lease. The pricing and structure of this lease would in most circumstances qualify for an off-balance sheet treatment.

** This calculation does not include the cost of having a potential "compensating balance" deposit account with the bank.

Leasing	Bank Loan
Leasing offers fixed rate financing. Payment remains the same for the full term of the lease. Rates are low when compared with banks terms and conditions.	Bank Loan usually requires floating rates for loans. Rates are low now but will change as prime changes. Banks may require compensating balances and/or charge substantial fees.
Leasing offers 100% financing and may finance the soft costs associated with the equipment.	Bank Loan often require down payments of 20% to 30% or more and may limit terms of 36 months or less with floating rates.
With Leasing the customer expands his credit lines beyond his "primary" bank's line of credit, building more resources for future growth.	An equipment loan is a portion of the total credit exposure the bank is willing to take on and may limit the customer future access to working capital and/or other required financing needs.
Leasing has the ability to build in flexible terms and conditions to meet the customer's cash flow needs.	Bank Loan's, in general, are not set up for step payments, delayed start of payments, or other unique structures.
The leased equipment is usually all that is needed to secure a lease transaction.	A Bank Loan usually requires the borrower to pledge other assets for collateral.
More of the cash flow, especially the option to purchase the equipment, occurs later in the lease term when inflation makes dollars cheaper.	A larger portion of the financial obligation is paid in today's more expensive dollars.
If structured properly, a customer can make his/her lease payments with pre-tax dollars and treat them as a business expense.	A customer must capitalize the Bank Loan for tax and accounting purposes.
In the event of the lease qualifying as a true lease, the customer transfers all risk of obsolescence to the Lessor, as there is no obligation to own the equipment at the end of the lease.	With a Bank Loan (or conditional sale lease) the customer bears all the risk of equipment devaluation because of new technology / manufacturing progress.
When leases are structured as true leases, the customer 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 a larger tax deductions each year, which simplifies budgeting (equipment financed as a conditional sale lease is treated the same as owned equipment).	With Bank Loan customer may claim a tax deduction for a portion of the loan payment as interest and for depreciation, which is tied to IRS depreciation schedules.