Lease or Borrow? The Case of Small Equipment Contracts

Abstract

Using a specially-constructed dataset, we are able to compare the costs of leasing or borrowing that heretofore no research exists. With a 15% average yield in our overall sample of small contracts, we show that leases average about 12.5% while loans average 24%. After matching paired-samples of true leases and loans, the differential remains a significant 8.6%, while true and non-true leases show very little difference in yields. Using proxies for economic factors, cross-sectional regressions of yields on leasing contracts are significantly related to transaction costs, cost of capital of lessor, and financial risk of the lessee. In time series analysis, the average lease yields are significantly related to proxies for macroeconomic risk and demand factors. All told, it does appear that leasing can be a less costly form of financing and there are reasonable economic factors that account for the pricing.

Keywords: Leasing, Loans, Yields

JEL Classification: G21, G23, G32