Focus on Leasing: Advantages of Leasing
Posted on Thu, Mar 04, 2010 @ 09:47 AM
Often, I have met with clients who want me to quote them a "buy price" and a "lease price" for new technology procurements - a very reasonable request. What I have learned, however , is that my client was really asking a very different question: "How much does your solution cost and what is the most cost-effective way for my organization to pay for it?" This is where the confusion starts.
Example
Say you see an advertisement for a "brand new 44" multifunction plotter starting at only $399 per month."
You think, "wow, what a great deal. We can afford the payment." But let's dissect the offer. Below is a list of questions that you should immediately ask yourself.
- Is this a purchase or lease price?
- What is the down payment?
- What is the term? (There's a big price difference between 36 months and 72months, for example.)
Here is where the math gets tricky. Let's think back to the buy price vs. lease price question. If your organization needed a 44" multifunction plotter, the $399 per month is very attractive. But think about that offer: If you know that the cost to buy that printer outright is $38,000 plus tax, that would mean that financing plotter for 72 months would equate to a cost of more than $550 per month. Keeping in mind that 72 months is six years, how is it possible to buy a $38,000 unit for only $399 per month?
Most likely, the $399 per month payment is for an operating lease, which provides a low monthly payment for the use of the machine. You only pay for depreciation for the duration of your lease term, and do not own the machine at lease end. If the plotter generates monthly revenue, there is an advantage to keeping your monthly payment lower than the revenue it generates, thus increasing ROI. This low monthly cost is the advantage of the operating lease. At the end of the lease term, you can turn in the existing multifunction plotter and lease another new one, effectively upgrading for a very low cost.
In this example, the major benefit is that you have successfully increased your buying power. In contrast, buying the plotter outright would cause a drop in available cash, result in a lower ROI and require an expensive upgrade in the future. The trade-off is that leasing requires more discipline and commitment than buying. For example, you don't get to keep the printer unless you buyout the lease. You also need to consider the cost of end-of-lease processes.
Advantages of Leasing
In any leasing scenario, there are several potential advantages to consider when making a procurement decision.
Options
Leasing provides your organization a lot of ownership options. Your new IT products and services can be leased for a term and then returned, renewed, extended, or purchased.
No Down Payment
It is typical to put $0 down when leasing IT products and service. However, making a down payment lowers your monthly lease payment, so it may not always be the best option.
Everything is New
Almost all leases for IT products require that the products being leased are brand new. This means that you get the full benefit of the manufacturer's warranty and don't need to worry about existing wear and tear.
Increased Purchasing Power
There are two basic ways that leasing can increase your purchasing power.
- If you only have $30,000 in the bank and you need to buy a $38,000 multifunction plotter you can lease it. A leasing company is extending you credit.
- If you know that you are going to need a new $38,000 multifunction plotter every four years, then leasing is a great way to keep your payments as low as possible.
Balancing Cost and Value
Leasing gives you an advantage if the monthly lease payment for a bundle of IT products and services creates a return that exceeds its cost. By using equipment for lowest possible monthly price, you increase your monthly net revenue.
Fixed Rate Financing
Your money factor is fixed for the term of the lease. Fixed-rates financing make it easier for your organization to project monthly cash flows. Very little consideration is given to market fluctuations after the lease is signed.
Less Sales Tax
Instead of paying the full tax amount up front, a portion of every monthly lease payment is paid for sales tax. In addition, you pay tax only on the dollar amount of the technology products and services value you are using, not on the residual value.
Flexible Payments
In many cases, you can negotiate monthly lease payments that meet your needs. Adjustments to your monthly payment can be made by adjusting the term of your lease or by correcting the residual value of the IT products and services due at the end of the lease.
Fewer Service Issues/Costs
Many IT products come with a three-year manufacturer's warranty. Leasing potentially gives you the advantage of never being out of warranty, therefore keeping your ongoing service and maintenance costs down.
Conserve Working Capital (cash)
Leasing allows you to keep cash in the bank or invested in higher priority projects. Compared to other company assets such as property, plants, and manufacturing machines, IT product lifecycles and depreciation are very short - sometimes as little as three years. Paying for IT products and services for lifecycle refresh projects with cash may not be the best use of your cash.
Preserve Your Credit Lines
Your bank lines are more useful to your organization for inventory, accounts receivable, and emergencies. Tying up bank lines with fixed assets decreases your borrowing power, while leasing allows you to finance your IT products and services without disturbing your bank lines.
Gap Insurance Included
Some leases include free gap insurance meaning if you break your laptop beyond repair and/or it is stolen, and there is a gap between what your insurance company will pay you for the loss and the amount you owe, you'll be covered for the loss.
What factors were the most important in your last IT procurement?
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credits:
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