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The Real Advantages of Leasing

The benefits of using leasing to acquire equipment are significant but can vary depending on the specifics of the transaction. With annual lease volume approaching $215 Billion, the popularity of equipment leasing has never been greater. We anticipate the information below will provide you with helpful insights.

Leasing vs. the Bank

Why the bank's rate is not always what it seems to be.

Banks usually require customers who are granted loans or lines of credit to maintain checking accounts with compensating balances equal to 20% of the funds being lent. The example below highlights how the bank's true rate is understated by over five percent on a 36 month loan!

$25,000 bank loan payment at 9.50% $801.00
$5,000 compensating balance required  
$20,000 amount of net loan proceeds  
Interest paid over 36 months $3,836.00
True APR, based on $20,000 net loan 14.77%

Use of Borrowing Capacity.

The use of a bank loan or line of credit to acquire equipment can negatively affect the future growth of your company. A bank will lend up to a certain level based on financial strength and the bank's underwriting credit criteria. Using these funds to buy equipment reduces the amount of money available for marketing, hiring personnel, expansion, and other uses where the rate of return is substantially higher than the nominal expense of a lease.

For example, let's assume your return on current equity is 25% in the business at present. Your company is looking at equipment costing $100,000. You have a line of credit at the bank sufficient to buy the equipment.

Cost per month to lease for 60 months, true lease* $1,278.00
Increased income, per month, based on use of $100,000 for marketing and expansion ** $2,083.00
Monthly net advantage to leasing $805.00

*Based on 40% federal, state tax brackets.
** $25,000- annual increase in income based on 25% ROE.

Lines of Credit versus Leasing.

In addition to reduced borrowing capabilities, the use of a line of credit to buy equipment has two unforeseen or hidden problems.

  • First, most lines of credit have a one percent annual fee, thus adding three to five percent to the cost of the equipment. Avalon Leasing has no such fee.
  • In addition, revolving lines are renewable annually, whereas, once approved and funded, a lease can not be “called” early. At present banks are starting to significantly tighten their lending standards. Why not use our funds to acquire your needed equipment?

Secured Collateral.

Avalon's leases secure only the equipment being financed, nothing else. Bank loans and lines often have all asset liens, unnecessarily attaching assets that have nothing in common with the equipment being financed.

Balance Sheet Issues.

Intelligent use of leasing can enhance your company balance sheet, making it easier to qualify for or keep loans and lines of credit for alternative purposes. True leases have payments that are expensed. However, any sort of financing of equipment can dilute your balance sheet due to the addition of debt. This is magnified if your banker values equipment based on wholesale “auction level” pricing when determining your borrowing capacity.

Swiftness of Leasing.

If speed is an issue, then Avalon Leasing can approve and document a lease in as little as one day! Vendors are funded in mere days, enhancing your relationship with your supplier.

Leasing vs. Paying Cash

The Value of Cash.

One of the most important aspects of running a successful business is having cash available to operate your business in good times and bad. The value of maintaining adequate cash cannot be overstated. Our wide array of leasing services and programs enables your business to retain its cash for other needs.

Increase Income.

Using cash for marketing, employee hire, expansion and other day-to-day business improvement needs historically has proven to yield the greatest return on investment. With after-tax rates below 0% for true leases, Avalon Leasing enables your company to maximize its long term income.

Balance Sheet.

The use of cash to buy equipment reduces your borrowing capability at the bank significantly. Let's say your bank lends at four times your liquid net worth. That new $50,000 piece of equipment may be worth $30,000 wholesale. Your banker will use the lower number for lending purposes. effectively reducing your borrowing capacity by $80,000! Avalon's lease programs enhance your balance sheet, not detract from it.

Simplicity

Easy Application.

Avalon's application process is fast and simple. A one-page form covers requests to $75,000, with financial statements required over that amount. You can even apply by phone by calling (888) 332-8007.

Fast Credit Decisions.

Most applications receive a credit reply inside one business day. This means your equipment will be delivered fast, just the way you want it. Our master lease lines of credit enable simple future equipment needs to be fulfilled even faster.

Simple Documentation.

Avalon's leases are all written in plain, layman's language. We want you to understand the terms of the agreement without needing a ten-times magnifier or hiring an attorney to review your lease!

Fairness.

We take significant pride in the fact our leases contain no annual renewal clauses, no extra interim rent, nor anything that could be construed as unjust. Our goal is to have you as a happy, long-term customer.

After-Tax Costs

True Cost of Leasing.

A properly designed lease can save the leasing customer about 40% in taxes, significantly reducing the true costs of using the equipment. Alternatively, Avalon's capital lease program enables depreciation or Section 179 expensing to be transferred to the lessee. Please view our sample tax savings illustration.

Balancing Payment and Return.

Entering into a lease makes perfect sense when the equipment or software being acquired either generates additional income or decreases costs. Using the after-tax cost of a lease will improve the monthly net income and shorten the recovery period for full payback.

Technology Factor

Use versus Ownership.

The benefit obtained from using equipment, rather than owning it, is a key concept with regard to leasing. This stands out the most when technology equipment is being acquired. Given the rapid change in technology, Avalon highly recommends true, FMV leases for its customers acquiring computers, servers, phone systems, and similar equipment.

Tech Upgrade Program.

Don't face the possibility of being stuck with outdated equipment or equipment that you have outgrown. Avalon Leasing's Early Upgrade Program entitles our lessees to upgrade to newer equipment at certain points prior to the end of the initial term.