What is Leasing?
In this article we look at the benefits to be gained in leasing and NOT BUYING OUTRIGHT or TAKING A LOAN your IT equipment.
- What Is Leasing?
- Is it Better to Lease or Borrow?
- Technical Reasons
- Financial Reasons
- Learn More
Leasing allows you to spread the cost of something over a period of time as opposed to buying outright. There is also a difference between leasing and borrowing, for example from the bank or finance company.
Depending on the type of lease, the item leased either becomes the lender’s property at the end of the lease or you pay a nominal amount and retain as yours. You can also just renew the lease and get brand new equipment, which is very common in IT leases.
Leases have many benefits over borrowing from the bank or buying outright but these are not always so well known. In this article we will explore these benefits to try to help you to decide if this is an option for you.
We look at a number of reasons whether leasing is a good option, including technical reasons and financial reasons, sometimes comparing with other methods of finance. Finally we list you 5 important questions to ask when considering leasing.
Is it better to Lease, Borrow Cash or Buy Outright?
This depends on individual circumstances, all have advantages and disadvantages, which we try to list below. In addition to the ‘technical’ reasons, there may be factors such as an inclination NOT to take on debt or a general mistrust based on experience.
Why do companies lease for reasons of technical efficiency.
Technology Renewal Cycles
FACT – People who purchase hardware outright are less likely to renew when it’s necessary. Normally after 3 years you should start to look at replacing your IT.
FACT – It takes three and a half times longer to fix issues, see article here from Microsoft on keeping your old computers and why it’s a bad idea ( https://news.microsoft.com/en-gb/2017/01/19/people-spend-day-every-year-waiting-old-computers-boot/ )
FACT – The time it takes for an older computer to boot up can waste 24 hours a year.
So you get the idea, it’s important to keep those machines up to date (see Moores law https://en.wikipedia.org/wiki/Moore%27s_law). Systems that are bought outright are more likely to be replaced after 5-7 years, the recommended renewal cycle is normally around 3 years. This means that they may not be performing as quickly as they could be, taking longer to respond, wasting valuable time, costing your business.
The average PC is almost worthless after 3 years, computers depreciate very quickly and have virtually no value after this time.
If we are honest, the reality is that you actually CAN’T EVEN GET GET RID OF THEM. Almost nobody buys second-hand PCs more than 3 years old nowadays and it normally costs money to get rid of them. Some you can give away to employees, your kids, your clubs, but the rest you’ll have to pay someone to take away.
With a lease you leave on a Friday with old equipment still working and come back on Monday with the new installed and working*, old computers gone, nothing left to dispose of.
(* Not literally, but you get the point)
Flexibility in Choosing Technology in an Ever-Changing Tech Landscape
In addition to the reasons above, you will have the freedom to choose your technology after term expires – making you much more adaptable to industry changes.
Most companies that buy outright these days are trying to save money on their computers, so they go for something that is ‘sufficient’, not something that is future-proofed or fit for purpose for the foreseeable future.
After the term (3-5 years) you can choose the RIGHT TECH for your needs. Your sector may have changed so you can choose the hardware that keeps you at the cutting edge.
This makes you much more competitive, many companies are stuck trying to make the requirements fit the cheaper technology. Imagine doing this with computers that are 5-7 years old AND the cheapest you could find at the time.
Process Easier and Quicker
The leasing process is much easier, bank loans are a nightmare, long, lots of telephone calls, lots of paperwork, you know how it is.
With leasing it’s an easy and quick process. There’s a minimum of information needed and decisions are sometimes as quick as 24 hours. As soon as the decision is made we can get the ball rolling on ordering and installation.
Leasing Can be All-inclusive
Some companies offer packages where everything is included, computers, installation, maintenance and support. This means a good complete package should:
- Cover all aspects of the installation and support, so no more separate IT support outsourcing (saving you money)
- Cover the complete Analysis-Installation-Monitor-Replace cycle
- Mean that the leasing tech company gets to know your company, so when it’s time to renew, they know exactly what is needed
- Mean no worries for 3 years, then 3 more on renewal, then 3 more, then…
This section is very attractive to the guys in the finance department!
There are several reasons why leasing could be a better option that buying outright or taking a loan with the bank, these are the following.
Financial Benefits – Cashflow
Leasing makes it easy to budget every month, as opposed to one huge cost, or an upfront cost, it’s a simple monthly cost each month covering the hardware and installation.
This makes it very easy to budget as a whole, especially where an all inclusive package has been chosen. IT costs can be very unpredictable, especially if you are paying an hourly rate to an IT outsourcing company.
Financial Benefits – Balance Sheet
Leasing is an operational expense and not a capital expense, therefore the costs per month do not have an effect on the balance sheet of the company. This means this is therefore not seen as debt or liability (bank loans are seen as debt) – ask your accountant why this is important if you don’t already know.
Financial Benefits – Tax
There are several tax benefits, including being allowable as Corporation Tax benefits, again, ask the bean counting superheroes.
Freedom to Choose Terms
There are several options for leasing, each of which you can decide that best fits your financial situation. You can decide the rental term (so longer if you want pay less monthly os shorter if you want to get it paid off as soon as you can), frequency (maybe once every couple of months?) and deposit (you decide the deposit, in some cases there is no upfront cost at all.
Frees up Other Lines of Credit
One of the great things about leasing is that it can have little effect on your other lines of credit, giving you more options should you need them.
So instead of going to the bank to borrow money or use up your only existing line of credit, leasing allows you at a later stage to use them for something else. Perhaps you will be looking at expansion or opening a new branch, these needs would normally have been taken up on the purchase of your computers, but the lease keeps them in your locker.
What Sort of Questions Should I ask?
Finally we have compiled 5 important questions that you should be considering when deciding whether a leasing contract is suitable for you. Here’s some of the questions you should be be asking:
- What sort of lease is it, capital lease or operating lease, capital leases are shown on the balance sheet and are considered assets.
Operating leases are where the leasing company has ownership and the lease is a monthly operating expense and not a depreciable asset
- Is there a buyout option, this means that for a nominal fee you can keep the equipment if you choose to, although normally you’d want to continue for another term and replace with new.
- How long, normally 3-5 years, we’d recommend 3 years for IT equipment. But in the end it might not be a good fit for you and you may want to retain the equipment.
- Do you need insurance? Most leasing companies will insist you include the leased hardware on your insurance and will want to see the policy
- How flexible is the lease, can we add to the computers at a later date? Can we terminate before the end of term?
So the final choice is yours, there are a lot of reasons why leasing may be the solution to where money is tight but technical needs are great.
BY THE WAY – Leaseback is a great way to get finance on the assets you already own, click HERE to find out more.