Loan to buy equipment // appreciating asset // new technology equipment // bank loans // leasing company

Why SunState Is Better Than Your Bank

Ownership Versus Use

Before seeking out a bank for a loan to buy equipment, consider that there is a difference between ownership of equipment and use of equipment from the perspective of profit generation. The only time that ownership of an asset earns profit is when that asset appreciates in value - like real estate, patent rights; precious metals or collectibles. If it is an appreciating asset, it makes sense to own it. If it is not an appreciating asset, it is logical to gain the use of it for the time that you are going to need it. Leasing facilitates this goal.

Another factor mitigating against ownership is that new technology is obsolescing everything that was “new technology” before, and that is something that is going to continue to happen in the future... only faster. So, given that most equipment is going to be worth very little very soon, ownership becomes even less desirable.

Bank Loans - "The Large Print Giveth And ..."

Banks charge lower interest rates than leasing companies, don’t they? Well, not exactly. That’s because rate per se, the cost per thousand dollars of equipment per month or the "interest rate" that is being factored into the transaction, is an unimportant consideration. Far more important are the terms and conditions of the transaction.

The terms of you "low rate" bank loan usually require that you keep some money, perhaps 20% to 30% of the loan amount in a non-interest bearing account at that bank as "compensating balances" (so the bank is really lending you 70 cents of their money and 30 cents of your own money for each loan dollar). When you compute the real yield on that, you find that a five year 8% loan with a 30% compensating balance requirement is really about a 24% loan (because you’re paying interest on 100%, but only getting 70%). Using the same formula, a 20% compensating balance requirement makes their yield on that 8% loan almost 18% and with a mere 10% compensating balance, it's still about 12.5%.

So you have this “low” bank rate, but you have to leave part of the money in the bank. You also have covenants that require you to maintain certain financial ratios, the bank has filed a blanket lien against your assets and you are cross collateralized with your personal accounts, your kids’ trust accounts and everything else. There is probably a clause in the loan agreement that says that if at any time the bank feels uncomfortable with your industry they can call the loan even if you have made every payment on time, and another that says they can increase their rate if their cost of money goes up. Oh, and they probably didn't want to finance the entire cost, preferring that you made a down payment. In short, there are terms and conditions that you probably didn't know about and a rate effectively higher than you imagined. So it is pretty clear that the “rate” is not the only factor in making a decision on how to finance equipment. You have to look a lot deeper.

Leases Are More Simple

A typical lease finances as much as 110% of the equipment cost because it usually picks up delivery, installation and other soft costs. It only requires one month’s rent in advance; there is a UCC filing only against the specific equipment leased; and the leasing company won’t bother you for the next five years as long as you make your payments. At the end of that time, they will sell you the equipment for its then current fair market value (probably minimal); and you will have expensed the payments directly for tax purposes.

Furthermore, SunState Capital will vary lease payments to match your cash flow curves. If you are in a seasonal business, that can be a crucial benefit to leasing. We will also match the payments to the logical period of time that you will be using that equipment before it is necessary to upgrade; and will allow you to upgrade without penalty. These are just some of the “custom” features available in our leases that usually aren’t in a bank lending agreement, and they affect your net cost. So, when considering financing, look beyond rate alone to the underlying considerations. You may find that, sometimes, "it costs less to pay more."