Financing Decisions

By Ibby Smith Stofer

Do I go to the bank or use a leasing company?

In a world of ever-decreasing human interaction, why would someone seek the help of an unfamiliar leasing company when their local banker calls them by name, or at least gives them the option to speak with them face to face?

Well, there are many reasons why enlisting the help of a leasing company may be a better choice than getting the help of your bank.

First we could examine the unwritten rule of “if it appreciates buy it, and if it depreciates use it but don’t own it”. However, while this is a good first consideration, it still doesn’t make our choice between the bank versus a leasing company. If you need help with financing, the choice of lease versus bank will take a bit more consideration.

Banks will secure their funding based on a lengthy and detailed set of documents. During this process, they often require the individual or business to have non-interest-bearing secured reserves of 10 to 20 percent of the loan amount. This is called the “compensating balance”.

Effectively, banks are actually lending you 80 to 90 percent of the amount and using your reserve to fulfill the balance of your need.

What that means is the advertised low interest rate is in reality often two to three times the quoted percentage. Why is that? It’s because banks are actually only lending you 80 to 90 percent of the money, while you provide the rest. When you compute the interest on 80 percent versus 100 percent, the results are very different.

Banks also will generally do a lien against all of your assets, not just the equipment you are financing. Leasing companies, on the other hand, will do a UCC against the single asset.

Secondly, banks will rarely finance the soft costs of installation and services. Software must not be a separate charge in order for the bank to finance these costs, since there is no tangible asset.

Thirdly, depreciation of an equipment loan from a bank will often be done over 5 to 7 years. Lease payments for the same equipment can be treated as an expense or capitalized based on the structure.

Other factors to consider include the following: are you getting a loan from the bank or a line of credit? Is the rate fixed or does it float with prime or other measures? Will you be required to provide ongoing financial statements for the term of the loan/agreement? How long will the bank’s decision take for approval? And what is in the fine print that you may be unaware of? Will they loan you money for the use of the equipment, or solely on the basis of a capital investment? The Federal government regulates banks and that limits creativity, risk, responsiveness and other measures taken into consideration when approving a loan.

Conversely, a lease program’s credit approval and funding is generally done within hours for approval and funding within one or two days, with few financials or paperwork requirements. All costs including delivery, installation, training, hardware and software and services can be included. Tax advantages vary with structure, so it is best to confirm these with the accounting team.

Often, manufacturers align with lease companies in order to match their customers’ unique requirements such as progress payments, step up payments, inclusion of the “soft” or intangible cost of training, installation, software and service. They will generally work with a particular lease partner who understands the equipment and services that the manufacturer provides in order to offer custom solutions versus standard bank or large lease company offerings. Yes, some lease companies can assume the behaviors and characteristics of the bank persona, so finding a company that is in alignment with the device manufacturer is an important consideration.

One other consideration when making this choice is that if you want to have the use of the technology today and make a purchase or return decision sometime down the road (considered off-balance sheet or operating lease structure), banks are reluctant to do this because they fear you will return equipment and have to deal with disposal via resale. Many banks are unwilling to take this risk. If the lease company partners with the manufacturer or supplier, they generally understand the future value of the equipment and will assume a higher equipment residual, resulting in much lower costs for you during the initial lease term. They know the risks and potential reward of your future purchase or return and are willing to assume that risk.

I asked Larry Stevens, the owner of Med One Capital, why he thinks customers chose leasing versus bank financing. Larry said it really depends on which customer we are discussing.

“Manufacturers choose to offer leasing through our company for both financial and strategic reasons. They need creativity and flexibility as well as options to help the end user proceed quickly and confidently, and to know that both the manufacturer and the lease company is in it for the long haul, as true partners with them.”

He added that some customers choose leasing due to their credit profile, while others choose to lease because they need technology and can not wait for either a lengthy or cumbersome bank process and approval or their own annual capital budget process.

Being aligned with manufacturers best serves the end user customer, and according to Larry here is why:

“Recently a major manufacturer of patient controlled analgesic devices (Lifecare PCA) could not supply customers with the dedicated vials used with the device. PCA administration is a vital medication delivery used routinely in hospitals. As a result, hospitals needed to replace their units unexpectedly. CareFusion Corporation is one of our valued partners and they asked us to help them provide these customers with their equipment, although there were no funds budgeted. Having a strong understanding of both the CareFusion equipment and the acute care customer, we responded quickly by offering healthcare providers a 6-month rental option that also builds equity with minimal paperwork.

“One more example of our ability to work with vendor partners in customizing solutions aligned with the vendors and customers process is as follows. We recently secured funding for a McKesson EMR system due to our understanding, and although there were other lease companies competing for the business, we structured a unique solution that the customer valued more than just another rate drop. Understanding what the customer values makes all the difference.”

This important choice is based on your business’s requirements and circumstances. While the lease specialist you contact may not know your face or your name, they will still spend the time to get to know your situation and business goals. There is a great deal of information available through trade associations like ELFA and others. Take the time to investigate before you open the door (or your wallet) to the bank. For more information, please visit our website at www.medonecapital.com.