It’s obvious when you fly across the country for a tradeshow that you’re going to rent a car, not buy one. And leasing a fleet of trucks might be a natural decision for your delivery company. But what about the technology throughout your firm? Should a small- to medium-size enterprise buy or lease PCs, printers, fax machines, and copiers? What’s the difference?
First, leasing doesn’t require up-front capital or tie up lines of credit. “Customers can overcome cash flow barriers, get more from their annual IT budget, and benefit from value-added services like asset management,” says James Barnes, senior public relations manager at Hewlett-Packard. “With leasing, customers get a single payment and the ability to finance a total solution, including hardware, software, and services. When the lease is up, they’re into the next generation of technology … they’re always up to date.” Of course, if you have an eye
on the bottom line, you know that not everyone needs the latest tech tools. If you buy rather than lease, and if you pay cash, you don’t have the built-in interest that comes with leasing. However, if you finance the purchase, you might end up paying more in interest.CONSIDER THE TERMS
Lease terms vary in several ways, including length (although they’re generally three years), upgrading to newer products, canceling, and the option to purchase. It’s important to start with a reputable vendor and to understand the terms, benefits, and drawbacks (both apparent and hidden). An obvious benefit comes at tax time: Instead of depreciation or Alternative Minimum Tax (AMT), you may be able to deduct lease payments as business expenses. Check with your accountant for details and limits. A hidden benefit is that interest, which is already buried inside lease payments, doesn’t compound the way credit card interest does on purchases. When is buying your best bet? When you’re paying cash, or would be satisfied keeping the equipment far beyond a normal lease term.
One downside of leasing can be the obligation to make all payments to end the lease-but you can mitigate that by switching to products that suit you better, rather than terminating the agreement with nothing. (Make sure you negotiate the cost of switching in the lease agreement ahead of time.) Costs you may not see coming could include document fees due upon signing (from $50 to $350 or more, according to the Small Business Administration; www.sba.gov), UCC-1 Fees (small fees required by the secretary of state in most states), state sales taxes (if applicable), and insurance.
While you may have no equipment to keep or sell at the end of the lease agreement, it’s usually not easy for the average business to unload used PCs, printers, and fax machines. Once they’re truly useless (which may be many years after the lease term would have ended), you might have to pay to get rid of them.
Companies such as IBM have certified processes for disposing of equipment when customers exchange it for new. According to Victor Ward, IBM Global Financing’s director of global sales operations, the equipment still has value, and “IBM sells it back into the marketplace.” Sometimes equipment is refurbished. Ward adds that it’s important to consider total cost of ownership from beginning to end, and suggests upgrading components within high-end systems, rather than replacing the whole system. If you dispose of equipment yourself, make sure your IT department copies old data, then wipes information from the old hard drives with strong overwriting programs, followed by strong magnets.
Is Tech a Good Buy?
Here’s a quick way to determine whether you should lease or buy office equipment.
LEASE
Up-Front Capital: Leasing doesn’t require much capital up front-mostly the first month’s payment.
Cutting Edge: It’s easier to keep up with current technology.
Hidden Costs: Non-cancelable agreements and interest rates spread out over the length of the lease.
Ownership: You’re not responsible for disposing of old equipment, and can begin a new lease with newer equipment sooner.
Tax Time: Lease payments might be deductible as business expenses.
PURCHASE
Up-Front Capital: May not require much up front, depending on whether you make payments or buy outright.
Cutting Edge: A good choice if you’re not interested in the “latest and the greatest.”
Hidden Costs: Purchases have taxes, warranties and, if purchased on credit, interest.
Ownership: You can use your equipment as long as you can squeeze life out of it.
Tax Time: Sometimes purchasing is more beneficial for your particular tax situation. Talk to your accountant.