Financing capital investments, such as IT equipment, machinery, vehicles, buildings and the like, can be arranged in various ways. It all depends on your company's needs and financial situation.
Bank loan or overdraft facility?
The rule of thumb is that businesses use bank loans for capital expenditure financing and finance operations using an overdraft facility. Experience shows that this gives the best financing structure and provides the best protection against liquidity problems.
The only argument for financing capital expenditures with an overdraft facility is that it can reduce interest expenses as you only pay interest when you need to draw on the facility. Generally, however, mixing capital expenditure and working capital financing involves few advantages.
Bank loan or mortgage loan?
When you finance investments with a time horizon of more than ten years, raising a commercial mortgage loan is usually cheaper than a bank loan. With a mortgage loan, you can borrow up to a certain percentage of the property's value, such as 60%.
For investments with a time horizon of less than ten years, raising mortgage loans is usually not recommended. Alternatives are bank loans and leasing. Bank loans have the advantage that there are no legal requirements for capital repayments and providing collateral.
Loan or lease?
Leasing can offer greater flexibility than loans or self-financing. It is especially popular with startup companies and other businesses enjoying rapid growth. With the type of leasing known as operating leases, the leasing company has the obligation to maintain the equipment.
Danske Leasing and Nordania Leasing conduct leasing services in the Danske Bank Group.