When a company is considering a major investment, several financing options are available. The choice between financing with equity, taking out a lease, or taking out a loan depends on the company's financial priorities and its risk management strategy. In this article, we compare these three methods, focusing on two essential aspects: cash availability and ease of access to financing.
Baseline Assumptions
| Criterion | Equity | Leasing | Loan |
|---|---|---|---|
| Investment amount | 100 000 € | 100 000 € | 100 000 € |
| Duration | 5 years (60 months) | 5 years (60 months) | 5 years (60 months) |
| Monthly payment | N/A | 2 198 € | 1 865 € |
| Deductible expenses | Asset depreciation | All rent payments (€2,198/month) | Depreciation + interest |
| Corporate tax rate | 25 % | 25 % | 25 % |
1. Equity Financing: Cash Is Tied Up
Financing an investment with the company's own funds means it directly uses its available cash to pay for the investment, without resorting to a loan or any other form of financing. This has an advantage of simplicity and avoids the interest or fees linked to other financing options. However, this method carries significant risks.
- Immediate impact on cash: By using €100,000 of cash for the investment, the company immediately reduces its liquidity reserves. This can limit its ability to deal with unforeseen events or unexpected costs, such as a drop in activity, urgent repairs, or business opportunities.
- No money for other investments: This money, if available, could be used for financial investments or other profitable investments, giving the company additional returns. By tying up this money in a fixed investment, the company gives up these growth opportunities.
- Limited tax advantage: Equity financing only benefits from the deduction linked to depreciation (€20,000 per year), which does reduce the taxable base but remains lower than the tax advantages of the other methods.
In summary: financing an investment with equity can be perceived as risky, because the cash disappears and is no longer available for immediate needs or to be invested profitably. Although there are no financial costs to bear, the company might regret this lack of liquidity in the event of an unforeseen cost.
2. Leasing: Simplicity and Flexibility - An Accessible Solution
Leasing is a financing method often preferred by companies, because it allows them to rent the equipment or asset while spreading the payments over several years. One of the major advantages of leasing is how easy it is to obtain.
- Ease of access: Compared with a bank loan, a leasing contract is much easier to obtain. The acceptance criteria are generally less strict, which allows a company to finance its investment quickly, even without an ideal financial situation. Unlike banks, leasing companies assess the company's borrowing capacity less rigorously, because they retain ownership of the asset for the duration of the contract.
- Impact on cash: With a monthly payment of €2,198, leasing spreads the payments, thereby reducing the immediate impact on cash. This helps the company keep some financial flexibility. Over 5 years, the company will have paid €131,880, a higher total cost than a loan, but with a lower risk in the event of a drop in activity.
- Tax advantage: Unlike the depreciation of an asset financed with equity, all lease payments are deductible each year. This allows the company to significantly reduce its taxable base, benefiting from an annual tax reduction of €6,594 (25% of €26,376 of annual rent). Over 5 years, this tax reduction totals €32,970.
In summary: leasing is a flexible solution that is simple to set up, especially for companies that want to avoid complex administrative procedures or cannot afford to tie up too much liquidity. However, the total cost is higher than with a loan, but the tax advantage is also greater.
3. Loan: A Compromise Between Cash and Tax Optimization
The bank loan remains a common financing method, but it can be harder to obtain than a lease. Banks require guarantees and demonstrated creditworthiness to grant a loan, which can complicate the process for some companies.
- Harder access: Unlike leasing, the conditions for obtaining a loan are stricter. The company must present solid accounts and be able to convince the bank of its ability to repay the debt. This can be an obstacle for growing companies or those with limited liquidity.
- Impact on cash: The bank loan at 4.51% results in monthly payments of €1,865, i.e. a total cash outflow of €111,885 over 5 years. This outflow is lower than that of leasing (€131,880), offering a less costly solution for the company while still spreading the payments.
- Tax advantage: The company benefits from a double tax reduction with the depreciation of the asset (€20,000 per year) and the interest paid on the loan (about €5,000 in the first year). This gives a total tax reduction of about €27,500 over 5 years.
In summary: a bank loan is often less costly than leasing, with a moderate impact on cash. However, the conditions for obtaining it are stricter and less flexible. The process can also be longer, with more administrative procedures and in-depth risk assessments.
Summary of Impacts on Cash and Taxes
| Criterion | Equity | Leasing (deductible payments) | Loan |
|---|---|---|---|
| Immediate impact on cash | Immediate outflow of €100,000 | Payments of €2,198/month | Payments of €1,865/month |
| Total impact on cash | 100 000 € | 131 880 € | 111 885 € |
| Annual tax reduction | 5 000 € | 6 594 € | €6,250 (1st year) |
| Tax reduction over 5 years | 25 000 € | 32 970 € | 27 500 € |
Conclusion
- Equity: Financing an investment with the company's own funds involves an immediate cash outflow of €100,000, making this method risky in case of unforeseen events. In addition, the company loses the opportunity to invest these funds elsewhere or to use them as a financial cushion. The tax advantage is limited to depreciation.
- Leasing: Leasing is a simple solution to set up, often more accessible than a loan. It offers a significant tax advantage with the full deductibility of rent payments, although the total cost is higher. The impact on cash is moderate thanks to regular monthly payments.
- Loan: A loan is less costly than leasing, but it can be harder to obtain because of banks' stricter requirements. Monthly payments are lower than with a lease, which gives better control of cash. However, obtaining a loan involves longer procedures and guarantees that some companies may struggle to provide. On the other hand, the combined tax advantage (depreciation + interest) makes it an attractive option from a tax standpoint.
In summary:
- Equity: High risk linked to the immediate tying up of cash, with a limited tax impact, but no debt to repay.
- Leasing: A simple and accessible solution, with a strong tax advantage and flexibility in payments, but a higher overall cost over 5 years.
- Loan: Cheaper than leasing, with a good balance between tax reduction and cash management, but stricter access conditions.
Each company must therefore assess its needs in terms of liquidity, flexibility and tax strategy in order to choose the solution best suited to its investment projects.