Leasing vs. Buying

Item

Leasing

Buying

100% financing

Leases provide 100% financing, but a security deposit may be required.

Loans generally require a down payment

Cash flow

Lower initial cash requirements and lower periodic payments.

Larger initial cash requirements and periodic payments.

Cancellation option

May grant the lessee the option to cancel, passing the risk of obsolescence of the asset to lessor.

Purchases can only be cancelled by selling the asset

Fixed payments

Lease payments typically are fixed.

Loans may have variable interest rate.

Maintenance costs

Lessee can often obtain a maintenance contract as part of an equipment tease—the lessor assumes responsibility for maintenance.

Purchasers may be able to obtain maintenance contracts, but they usually pay an additional fee.

Operating restrictions

Leases typically do not have restrictive covenants.

Loans may contain covenants that impose operating restrictions.

Access to funds

Leasing companies often evaluate a lessee's credit history on shorter terms than banks.

Banks may require several years of financial information and operating history before granting a loan.

Borrowing capacity

Operating leases are an off-balance-sheet financing technique. They do not affect the lessee's working capital or debt to equity ratios.

Loans usually affect financial ratios and borrowing capacity.

Residual value benefits

Residual values usually accrue to benefit the lessor. If residual value is conservatively estimated, lessor can profit from selling the asset at a price above the residual value.

All benefits from residual values that is, salvage value) are acquired by the purchaser. /'/

Residual value risk

In open-end leases, the lessee incurs the risk of a decline in value.

There are no residual value guarantees with purchases.

Interest rates

The implicit interest rates usually are higher than comparable loan rates because lease payments include a profit component.

Loans usually have lower interest rates.