A claw hammer is a small and handy object for pulling a nail out of wood. With little effort, it allows you to achieve maximum effect. With a simple handle, you can also save considerable interest. In both cases we talk of leverage.
A common argument against leasing is that leasing would be more expensive than a loan from the bank. Indeed, if you check over the Internet at what rates the bank is willing to give you a loan, it is often lower than the rate at which you can get a lease. The question is what you get then.
Example:
Suppose you buy a saw bench or a milling machine of about € 300,000. For a banker, this machine has a collateral value of 70% or € 210,000. Your bank might be willing to grant you a loan of € 150,000.00 (70%) on this with a term of 5 years. Either you have to finance the rest from your own resources or from your current account. The costs of the current account credit may not appear too high, but due to commitment and/or credit commissions, the costs are much higher.
We did run through this example based on realistic rates and come to the conclusion that there is hardly any difference at the bottom line between the price of leasing and the interest rate on loans from the bank.
Suppose you take a loan (€ 150,000.00 as in the example) from the bank and pay the difference from your own funds and the return on your own funds is, for example, 10%, then the comparison ‘leasing versus bank’ is entirely in favor of leasing. This is because you borrow half of the required amount, as it were, from your own company at 10% (because the bank ‘only’ finances € 150,000.00). The leverage then works against you whereas you should benefit from the leverage.
Looking at quality, there are important arguments for leasing:
1)
For example, in the case of leasing, no additional collateral is required from your company, while the bank provides the loan anyway under all the collateral your company has given (or will have to give). Think pledge inventory/debtors and/or mortgage).
2)
Another argument in favor of leasing, is that bank financing can be somewhat “messy” if you finance half with a current account credit. After all, there is usually NO repayment regime for the current account. It depends on your own discipline whether you wind down the overdraft. A leasing company looks much more at the economic life of the machine in question and then offers a lease with a term that takes that into account. If the saw bench or milling machine has an economic life of 12 years, you may be able to account for a lease with a 7-year term.
3)
Finally, we note that your machinery is skewed financed if you pay half from your own funds or from your current account. After all, machines are fixed assets (they last several financial years). If you pay half out of your liquidity or out of your current account credit, it comes at the expense of your working capital.
“With little effort, this is how you achieve maximum effect.”
