A good IT manager is always looking for ways to save money without jeopardizing the functionality of the enterprise. In the first part of this series, we discussed cost-saving strategies for acquiring, maintaining, and retiring equipment. In this article, we’ll focus on strategies for financing equipment.
Costs to finance
Basically there are four ways to finance equipment acquisitions for your company:
- Pay cash
- Finance with a loan
- Ask employees to bring in their own equipment
Clearly, number four is not a workable solution, and most companies will not want to drain cash that would be better used for day-to-day business expenses. This leaves us with financing with a loan or leasing. This decision should be a team effort and not be made solely by the finance department based upon interest rates. Instead, the IT manager should assemble all costs and all the benefits associated with each option.
If you decide to lease, keep in mind that leasing companies come in several flavors, including stand-alone companies and those tied to the manufacturer. The stand-alone leasing companies may appear to be less expensive. But if you look at the all-in costs, including turning back the equipment, you’ll see that you may not save much money in the long run. The manufacturer’s leasing company is usually more flexible and, as a result, more cost effective, because it’s their equipment and they use it for collateral. They’re also more flexible on returns because they have the ability to refurbish and resell the old equipment. The stand-alone leasing company will usually accept only equipment that has all the parts and is in good working order.
Leasing provides many operating benefits, including:
- Easier budgeting and planning. If leasing is universally adopted in your company, the results will be a regular and recurring monthly payment that’s easy to plan for both by accounting and for each cost center manager. Leasing often works best because hardware prices drop and technology is ever changing. Leasing basically disciplines a company into making ongoing investments in technology. Purchasing requires more effort to plan and budget, and it often results in a company's scrambling around for funds for unplanned purchases. This practice results in lower productivity or lost opportunities because IT was not able to make required purchases.
- Predictable costs and service levels. You can save money by combining the lease term with the extended manufacturer’s warranties. All service is covered and handled by the manufacturer, including any repairs at the end of the lease needed to return the equipment in good working order.
- No need for eBay or employee sales. The effort to sell or liquidate technology assets can be extensive and can have other hidden costs associated with it (i.e., personal property taxes or storage costs). Though there are costs for re-acquiring the equipment and packing and shipping to the leasing company, some leasing companies will actually provide this service as part of the lease.
Leasing benefits over purchasing
“You rely on equipment every day to operate and grow your business. But the value of that equipment comes from using it, not owning it,” according to Michael Watt, President of Dell Financial Services L.P. “By leasing, you transfer the uncertainties and risks of equipment ownership to the lessor, which allows you to concentrate on using that equipment as a productive part of your business.” He adds that leasing offers several benefits over other financing methods:
- Tax treatment. The IRS does not consider an operating lease to be a purchase but rather a tax-deductible overhead expense. Therefore, you can deduct the lease payments from your corporate income. For specific details on how leasing can offer your business tax savings, you should consult a tax professional. This may mean an immediate write-off without the headaches of loans and depreciation.
- 100-percent financing. With leasing, there is very little money down—perhaps the first- and last-month’s payment is due at the time of the lease—so there is more to invest in revenue-generating activities.
- Asset management. A lease provides the use of equipment for specific periods of time at fixed payments. The risk of ownership is transferred to the lessor.
- Upgraded technology. Your risk of being saddled with obsolete equipment is lower, because you can upgrade or add equipment to meet your changing needs.
- Flexibility and speed. Many leasing companies approve an application with 24 hours, and you can have your equipment very quickly.
- Conserve other credit lines. There are companies who are not concerned about credit or credit line availability, but in today’s tight economy, your credit status can be vital. With the manufacturer’s leasing company, it may be easier to obtain credit for the equipment you need because they know the true value of the equipment and have more options for reselling it.
Risks and drawbacks of leasing
It’s important to know that leasing does carry with it some risk. These include:
- Stiff penalties for early returns: The penalties for early lease returns are stiff and usually require cash for all contractual payments. You can negotiate “out clauses” in your lease agreement, but they will never be in your favor. But you have to avoid technical obsolescence by making sure that purchases stay within a “product life” and that you are working with a technology roadmap.
- Return the equipment or write a check: One factor in the lease payment is the residual, the amount or value placed upon the return of the asset to the leasing company. You run a major risk by not being able to return the equipment to the leasing company in good working order. The penalty in this case is writing a check for the residual value of these assets.
Deciding whether to purchase equipment or lease it is not an easy one, especially when you’re making that decision for an entire enterprise. I hope I’ve made it a little easier.