By: Rich Normann
The rate of technology change is increasing, with an emphasis on connected devices, faster system deployment and shorter life cycles. Organizations must find new ways to accommodate technological change. If done the right way, for the right reasons, leasing can be a feasible and cost effective alternative to purchasing equipment, particularly in the technology arena.
There are several reasons to lease equipment:
- Payment Reflects Usage– Businesses don’t pay employees in advance, they pay them as they contribute. It should be the same for an asset like business equipment. By spreading the cost of the equipment over the life of the asset, it will reflect its usage. In many cases, profits generated from the productivity of the equipment are usually greater than the lease payments.
- Immediate Acquisition of Equipment– You can acquire the equipmentthat is needed now, not when the cost meets budgeting requirements. This allows you to facilitate rapid and up to date technology deployment.
- Conserves Working Capital– Cash flow is king. Capital can be employed for other profitable purposes such as buying inventory, advertising or hiring additional personnel. When equipment is purchased with borrowed funds, credit lines with a lender are reduced. When equipment is leased, a business has in fact established an additional line of credit with its lessor.
- Planned Budgeting– Monthly payments are generally fixed for the entire term of the lease and can be made to match your cash flow. This enables you to budget and manage equipment dollars for a long time while eliminating budget spikes.
- Protection from Obsolescence– Today’s equipment is technologically obsolete much sooner than before due to technological advances. Leasing provides built in flexibility by offering early settlement and upgrade options during the lease period.
- Longer Terms– Many banks only lend money short term, usually 12 to 36 months. Under leasing arrangements the term can be as long as 60 months and in some cases even longer.
- Tax Benefits– Equipment leases are typically classified as operating leases and a lessee can usually deduct their monthly lease payments as an operating expense. This clearly reduces the net cost of the lease. It’s always best to consult your tax accountant first; however, leasing is generally advantageous to most businesses.
- Easier Equipment Disposal – With leased equipment, the vendor, as the asset owner, assumes disposal responsibility and cost.
- Standardization– Good leasing contracts can help organizations standardize on particular platforms quickly and consistently, resulting is savings in staff labor and maintenance while improving operating efficiency. Total maintenance costs can often be lowered due to the standardization and to the use of new equipment.
- Shift in View of Technology– Leasing often encourages viewing equipment as a business tool, rather than as assets with expected longevity or as a personal preference for the employee.
Leasing isn’t for everyone. It requires a careful analysis of your organizations availability of capital, administrative capacity to track equipment and deal with vendors, and risks associated with signing multi-year contracts. However, leasing has become a very feasible and cost effective alternative to dealing with technology advancements and budget constraints in today’s business world.