A company must look at its circumstances to decide whether to use bank debt, capital lease or operating lease financing when making a large purchase. If your company has good income, a strong cash position, and comfortable borrowing capacity, a bank loan would be a good choice. With a bank loan you will most likely need to make a down payment, but you can use accelerated depreciation under the tax code to offset current earnings. Generally interest rates for the bank loan will be lower and reduce the overall cost of the financing.

A company with less of an ability to make a down payment can benefit from the same acceleration of depreciation through a capital lease, which allows capitalization of the lease on the balance sheet just as with a bank loan. The imputed interest rate for the capital lease will most likely be higher and therefore cost the lessee more than using bank financing. Additionally, the leasing company will normally be willing to finance the entire amount without a down payment from the lessee. Since the lease is capitalized, the lease liability would be recorded as long-term debt on the balance sheet and the company should review the transaction to make sure that it does not run contrary to restrictive covenants on outstanding bank debt.

Lastly, an operating lease may be the right choice if the company does not have a strong cash position, available borrowing capacity, or need to offset earnings through accelerated depreciation. An operating lease is not capitalized, but rather the rental payments are recorded on the income statement as a rental expense throughout the life of the lease. Also, an operating lease may be the right choice if the item leased has a risk of becoming obsolete by the end of the lease. With a capital lease or bank debt, the company would end up owning the obsolescence.

—Jason A. Meyer, Managing Director, HPC Puckett & Company


HPC Puckett & Company specializes in mergers and acquisitions of wholesale optical laboratories. Send comments or questions about this article to Jason A. Meyer.