Lease vs. bank loan
You should be aware of these terms and conditions when considering a lease or a loan
- Default provisions: Generally, bank loans will consider you in default not only if you are in default on your current loan, but any other loan with that bank or anyone else.
Often you are in default if the bank just thinks you may not be able to pay your loan off.
Loans to hardware stores have been called because the bank didnt think the local merchant could compete with Home Depot.
- Remedies: Most bank loans have set-off provision. This allows them to take money (without notifying you) from any other account (with the exception of retirement accounts) you have with the bank including personal and joint accounts to make loan payments.
They may also require you to pledge additional collateral during the term of the loan to keep them from calling the loan.
- Financial Statements: Most banks will require you to submit annual or quarterly financial statements or tax returns. Additionally, the loan may be conditional on your maintaining certain financial ratios.
This may hinder your operating the business as you deem prudent. If you fall below those minimums you are in default.
- Liens: The bank will often place a blanket lien on your business. That means you may not be able to acquire additional equipment for your business without the banks approval. Hence you have taken in a silent partner with veto power.
- Compensating Balances: Most banks will require you to keep a certain amount of money in your non-interest bearing accounts. This effectively raises your rate. Additionally, you will not be able to change banks without paying off the loan.
|Equipment Cost: $20,000
Quoted Interest: 8%
Term: 36 Months
|20% Compensating Balance
REAL RATE: 23.88%
10% Compensating Balance
REAL RATE: 15.31%
- Mergers: Your bank may be purchased by another bank, and the surviving bank might have different lending criteria or may not like your industry or the equipment. Because of the very loose default provisions; they have the ability to call your loan.
- Documentation, fees and closing costs: The bank will have documentation fees and closing costs from 1% to 4%, which greatly affect your true rate. Make sure you get a copy of the loan agreement prior to signing and read it carefully. We are happy to give you a copy of ours.
- Rates: The interest rate may not be fixed.
- Personal Guarantee: If you have ever signed and guaranteed a loan with this bank, that personal guarantee may still be in effect. Dont think your not signing a personal guarantee on the current loan eliminates your guarantee. Your first guarantee is "continuing and unconditional"!
- Working Capital: Your bank is your ONLY source of working capital.
If you utilize that line of working capital for an equipment loan, you have reduced your access to additional working capital, which may be the difference between success and failure of your business.