Leases vs. Your Bank

2 Things Your Banker May Not Tell You:

1) Leasing uses up your credit line
Often times, businesses are surprised when the available cash they've been counting on from their bank credit line is reduced by the amount of equipment leases they've done with the bank's leasing department.

Since commercial credit and leasing are frequently different departments within the bank, it's easy to assume that the commitments made by each are separate and cumulative, which is rarely the case.

This is why we advise that you plan ahead and establish multiple, unrelated credit sources, turning to independent, non-bank leasing companies for your equipment needs.

Your bank has a credit limit that they'll extend to you. Typically, whatever you do with them counts towards it whether it's short term cash borrowing or long term leasing. If you want to be sure to have cash available quickly when you need it, you won't want to tie that credit line up in leasing fixed assets!

2) Compensating balances increase interest cost
Many businesses are lured by seemingly unbeatable rates to bank leasing programs. But if any part of that plan includes minimum or compensating balances in any other account, it may not be as good as it seems.

Often times a loan/line of credit is subject to approval contingent upon a minimum balance being maintained in your bank account with that particular bank. This will drastically increase your effective annual interest rate!

For Example:
Your bank approves a $50k loan/line of credit with a contingency of a required minimum $10k balance in your account at all times. The bank is really only lending $40k of their money.

Calculate the interest rate and monthly payments based on the $40k the bank is really lending and you will have an interest rate that is far from what was quoted on your so called $50k loan at prime rate...

A few other reasons why the local Bank may not be attractive for leasing equipment:
Banks will often FLOAT their rates. Equipment Lease rates are guaranteed fixed for the term of the lease.

  • What effect will a new loan have on the cash available under your current business line of credit, for special business opportunities, emergencies, etc.? (In most cases your total access to funds will be reduced).

  • Most banks require that credit lines be brought to a zero balance once every 12 months to reserve the option to call the line should your industry/economy start to have a downward trend or your own business prospects start to go south.

  • Banks typically do not fund more than 75%-80% of equipment cost. Our lease can cover as much as 110% of the cost. Unlike banks, we will Include freight, training, installation, taxes, initial maintenance and soft costs. Many banks will only do "hard" collateral (machinery, etc.). Most banks will not even consider "used" equipment, older vehicles, software or private party transactions. As you know JB2 Funding has no problem with any of these.

  • The bank may place a "BLANKET LIEN" on all of your assets. At JB2 Funding, we simply file a UCC on the leased equipment only. Nothing else is encumbered. None of your financial assets or flexibility will be compromised.

  • If the bank were to decline to renew your line (at any point in the term), those "blanket liens" would still be in effect, blocking your attempt to use your own assets as collateral for any new (replacement) funding. You will also not be able to subordinate that lien without their permission should you want to pull equity out of that equipment.

  • Banks require "Ongoing Financial Disclosure" and updates of your financial position. With a bank line you have a new vested business partner, requiring you to submit annual-quarterly financial statements & tax returns for review. Bank loans are often conditioned on your maintaining certain bank-specified key financial ratios. If you fall below the bank's mandated ratios, you will be in default and the bank can call your loan or not extend further credit towards your company. Also, It is routine for banks to restrict your access to any new debt obligations from any other source without their express written consent and approval. There are NO financial reporting requirements with a JB II Funding Lease.

  • The bank will likely require you to cross-collateralize any new obligation with all of the accounts you maintain at that institution - personal checking, savings, trusts etc. (buried in the fine print). Your lease with JB2 Funding is a freestanding obligation.

  • Fees & Closing Costs:
    Bank Fees and closing costs typically run 1%-4% of the transaction amount and these fees will re-occur annually!! These fees can have a significant effect on the real interest rate you are paying. Ask for a copy in writing before you sign and do the math. JB2 insists on no documentation fees, no annual fees and no hidden fees.

  • Are you a "Key Banking Customer?"
    That may sound flattering, but it usually means that the bank is extending its offer based on your "entire banking relationship", your other accounts, the other balances you maintain and the service fees/income that you generate for them. It also means that you are tied to that bank exclusively for the term of the loan. If you move accounts and/or services, your rates will almost certainly jump way up. Not sure? Ask them specifically
Your Credit Report & Fico Score:
  • Banks: Lines of credit & Loans will show up on your personal credit report as a revolving trade line or an Installment Loan. This may affect your available credit, drive down your Fico score and may hinder your ability to purchase personal items such as an automobile, house, etc in the future.

  • JB2 Lease: Equipment Leases WILL NOT show up on your personal credit report as a revolving trade line or installment loan and therefore free up your credit without hindering your credit availability.

  • Banks: Require full review of financials, tax returns and projections which may take weeks for a turn around time on approval. A JB2 Lease requires a simple one page credit application up to $100K. Approvals are issued within 24 hours.