Question

Why do you think it is easier for companies with weak credit positions (scores) to obtain leasing financing than to secure a bank loan?

Answer 1

Business can be financed either by taking the loans or by obtaining the assets on lease. For taking loans from the bank company must have enough collaterals as a security for large loans. While in case of leasing there exist a contract between the two parties in which one party called lessor who is the owner of the asset while other party is the lessee who takes assets on lease.

For companies having weak credit positions it is not easy to take the loans from the bank as such companies do not have enough collaterals to provide to the bank for security purpose therefore banks are not willing to provide them the loan due to the credit risk. Also most of the companies having weak credit positions do not have consistent cash flows so banks are unsure about the interest payment to be done by such companies. Many times banks are not willing to provide loans to the companies having weak credit position because of the poor track record of not being able to sustain properly and not being able to make profits. Banks also fears that providing loan to such companies might cause loss to the bank if the companies are not able to pay the money back and convert into bad debts.

On the other hand in case of leasing companies are not required to make large payments as in leasing assets are taken by the companies on the temporary basis from the lessor for a period of time. Since, assets are provided on temporary basis so it is relatively cheaper than taking loans and buying assets. So lessors are willing to provide the finance to such companies as they think that even the companies having weak credit position would be able to make the required payment so risk in leasing is less than the risk in providing loans by banks. Also, in case of leasing payment is made over a period of time at certain intervals as per the contract hence, burden of making huge payments at a time is not there. So, because of lower risk in providing leasing financing companies having weak credit positions are able to get the leasing financing.