18 Nov

A New Bus –Lease or Loan

by Todd Loudis

By Todd Loudis

Most business managers cringe at the thought of a new bus acquisition for
a church. The congregation gets excited and the pastor knows that a new bus will present a
better image of the church to the community. But when it gets down to the question of how
a church can afford it, the bus acquisition often becomes a worrisome proposition.
Business managers should consider two financing options when a new bus acquisition is
planned: traditional bank financing through a local bank or vehicle leasing through a
finance company. Each option has its own benefits and drawbacks.

Loan and lease both offer the ability to pay for the vehicle over time with normal
length of term financing covering 24 to 60 months. Fixed payments over time allow the
church to plan for a monthly payment of a certain amount. In a normal business operation,
there are tax considerations available with each option but in a church setting, these
considerations will not necessarily apply.

What’s the difference then? Should the business manager not just shop for the best rate
and go from there? The differences lie in the programs each outlet offers the church.
Please be aware that we are discussing the typical transaction. Each transaction may vary
among all banks and lease companies. By knowing what to ask and what is required, the
business manager can make a more informed (and hopefully the best) decision about the bus

Bank financing

A local bank knows your congregation and, quite possibly, a member of the church works
for the bank. They know your history and would like to share in your growth. Bankers love
the fact that they can drive down the street and see your bus in the parking lot, knowing
they had a part in helping you finance the vehicle.

Banks are governed by rules that allow them to make loans based on their own portfolios
and certain ratios. They are often tied to specific programs that allow their loans to fit
into these ratios. Therefore, a local bank may tend to be more conservative in their
operations. Business equipment loans from a bank often require a significant down payment,
usually from 10- to 20-percent of the equipment cost. On a $40,000 bus, this may be an
$8,000 cash outlay. Yes, your payments then become less, but that initial cash outlay may
pose a problem. A bus is a depreciating piece of equipment. Banks are often leery of
committing to a loan term of over 36 months for these types of vehicles as the maintenance
and hard use depreciate these vehicles quicker than an automobile. Used vehicles may also
be financed through your bank, so check with your lender on their programs.

Your church may also have a credit line established at a bank. This essentially says
your church has a certain amount of dollars that it may borrow for whatever reason. This
is a great safety net if, for example, a heater or air-conditioner needs to be replaced or
that piece of property next door becomes available. Tapping that bank line for a vehicle
purchase reduces this available credit. The best function of this bank line is to use it
or preserve it for operating expenses. The perfect example is during stormy weather season
when collections are not as strong because attendance has fallen and your bills are still
coming due.

Lease financing

Lease financing funds are typically provided by insurance companies, holding companies
or businesses that invest their available cash to leasing portfolios. They are limited
only by their own funding requirements in regards to ratios and compliance. Although it
may not know your church the way a local bank will, consider also that it is not
prejudiced by what is known about your church and congregation.

Leasing uses the financial principle of “Pay for the part of the life of the
equipment that you use.” A fair market value lease or operating lease determines at
the end of the lease term what the piece of equipment will be worth. Subtracted from the
purchase price, you are paying for what you use of the equipment. An example, a new bus
sells for $40,000 and it is determined after 48 months, the bus will be worth 25% of the
original value or $10,000. Your payments are based on the $30,000 difference. At the end
of the lease, you may have several options. You may return the bus and owe nothing more.
You may purchase the bus for the fair market value ($10,000) or you can continue to lease
the bus based on the $10,000 price. You have, in effect, paid for the portion of the life
of the bus that you have used. Because of this, your monthly payments are less because you
are paying for less of the bus. Another benefit of leasing is that at this time, you may
upgrade your current equipment without the disposal hassles of selling the bus to someone

A finance (or capital) lease works the same as bank loan. At the end of the lease term,
you will own the bus outright. The difference between a finance lease and a bank loan is
the required down payments. Typically, a lease will only require the first payment in
advance or the first and last payments in advance. In the case of a 48-month term, this is
4% down or in our $40,000 example, $1,600–quite a difference in out-of-pocket cash. Lease
companies will also provide financing for used vehicles.

A lease is often non-cancelable. Herein lies the biggest drawback in that you are
committed for the term of the lease. Some lease companies will offer a buy-out after a
certain amount of time, but be prepared to pay a cancellation fee.

Credit review

Because no one owns a church, it is usually incorporated with a Board of Directors
acting as the managing body. Most banks and leasing companies will accept this as a
corporate-only transaction. No one with the church will be personally held as the
guarantor of the lease/loan. Because of this, you will need to provide audited financial
statements for a minimum of two years or tax returns if the financial information is
unaudited. This will prove to the institution whether, based on past performance, your
church will be able to handle the payments. You will also be asked for credit references
that you have charged with currently or in the past. Documents are then executed for a
managing director to sign.

Special considerations

Maintenance needs to be performed on all vehicles regardless of age. Some equipment
dealers provide a maintenance contract as an addition to the sales contract. Lease
companies will finance this contract amount with the bus lease. This is important to
consider because your church will be responsible for maintaining the bus in proper and
safe operating condition.

When acquiring a new or used vehicle, it is important to have the proper insurance
coverage. It does not take a large accident to exhaust the limitations. Because a lot of
churches do not have full-time drivers and rely on volunteer help or part-time drivers,
safety factors come into play. You are urged to check your existing policies for proper
coverage. Most lease companies will require a minimum $1,000,000 liability policy.

There is no easy answer to the question of leasing versus buying a church bus. Because
there are no real tax benefits, the answer should depend on the cash flow situation of the
church. Do you want to pay more up front or pay more on the back end?

Todd Loudis is the Director of Sales for Capital Funds Equipment Leasing in Joplin,
MO. Any questions may be directed to him at (800) 653-5327 or [email protected]

Down Payment First and Last – $1,640 10% – $4,000
Monthly Payment $820 $897
Total of Payments $39,360 $47,056
Residual Value $10,000 $0
Down Payment First and Last – $1,500 10% – $4,000
Monthly Payment $750 $750
Total of Payments $45,000 $49,000
Residual Value $6,000 $0
you can see, up-front expenses are lower with the lease option. A business manager will
have to decide which program fits the church’s cash flow needs.