Why is "equipment leasing" the stepchild of "equipment financing"

What do you think of when you hear the words "equipment leasing"? If you are like many people you think of "renting" or "non-ownership". Some people immediately think of a never ending payment obligation or an end of term (surprise) balloon payment. Others think of leasing as an "expensive" type of financing, probably not as attractive as a bank loan. Still others think of equipment leasing as a form of financing used primarily by companies who may not qualify for a traditional loan or bank financing. Would it surprise you to know that the Equipment Leasing Association reports year end and year out that over 85% of major companies lease some or all of their equipment. Its a common practice that every year involves tens of thousands of companies and billions of dollars in equipment "leased". In many cases leasing may actually be the lowest financing alternative of all options. Yet it has this element of the "step child" or maybe the cousin that not everyone in the family wants you to meet or know about.

I think part of the reason that leasing has a "mixed" reputation is that it is not very well understood. In my experience I have met many highly educated, professionally astute, business executives, chief financial officers and financial decision makers who were very comfortable with the idea of borrowing on a simple interest bank loan basis but who had absolutely no idea what a "Capital Lease" was. When it comes to True Leases, Fair Market Value Leases, or Operating Leases the understanding level shinks from nil to nada. I some respects the leasing industry itself may be to blame. Many of the terms used by lessors are archaic and create a mystic that fosters a "if I don't understand it, I won't use it" resolve. In addition, some lessors, especially in the past, have used less than scrupulous tactics to squeeze out end of term profit windfalls and additional "upside" opportunities. Many CFO's will go into a bank loan with floating rates, restrictive covenants, compensating balance requirements, large annual fees and think that because it was ordained by their bank it must be entirely better than an equipment lease from the Leasing company proposal. And yet,many times, when all the costs are factored in the Lease may be a better option. It is like the answer to the question "What is your Rate"? (It all depends).

The next time someone asks you about leasing suggest that they learn about the wide range of options that lessors offer today.....and do an absolute comparison..........factoring in all costs.