Focus on Leasing: Taking Advantage of Interest-Free Leasing
Posted on Fri, Apr 16, 2010 @ 03:37 PM
How can your organization leverage 0% interest leasing to your advantage? As the IT decision maker, it is important to understand how and when to use this type of OEM program. Remember: there is no free lunch. When interacting with your finance or treasury department and financial decision makers in your organization, it is very important to have the facts of how your proposed 0% interest (or interest-free) lease works.
0% interest leasing is an OEM sales tool
I have yet to find a bank or leasing company that is willing to loan interest-free money. OEMs, on the other hand, are willing to provide this type of low-cost lease in an effort to hit their sales and revenue targets. A 0% interest lease program may be a wise use of your organization's money, so it important to understand the framework in which you will need to consider your decision.
Also, if you already have a strong, existing lease partner, the OEM programs may be more difficult to justify, as there may be more complexities or risks involved in deviating from your existing lease partner — terminating that relationship may result in lower quality negotiations with them in future. Or, if the buyout of an existing lease is required to end the relationship, if can be expensive. Also, there is inherent risk in not knowing much about a new lease partner as compared to the partner you're already familiar in conducting business with.
However, there are certainly instances when entering into interest-free leasing agreements makes good business sense. Simply consider 0% interest leasing as an opportunity for additional product discounts. Previously, we talked about the fact that OEMs will often create special lease offers on a specific products that are in great supply, or may offer opportunities to buy any product within a specific lease structure — interest-free leasing can fall into both categories, and can be broken up into programs that suit the needs of small, medium and large organizations alike.
Small Business Programs
As an IT decision maker for a small or medium-sized business, you understand that your budget for IT purchases may be limited, making 0% interest leasing an attractive option.
One style of program offered by many OEMs that may help make your procurement less expensive is a short-term, 0% interest, $1-out lease. While the term is very short (typically 12 months), this type of lease is still considered a capital lease because of the $1-buyout structure and transfer of title at the end of the lease. This is a great alternative to borrowing money or using a bank line to finance the purchase.
Understanding this program should be very straightforward: simply add up your purchase price plus sales tax and shipping, then divide the total by 12. Your calculation will be very close to your actual payment.
The major drawback to this type of program is that services are typically not included in the lease — if you plan to purchase a products and services bundle, the 0% interest option will likely not apply. That being said, paying cash for the services and financing the hardware at 0% for 12 months is still a good deal.
Medium & Large Business Programs
In my experience, most mid-size and large organizations have strict lifecycle/refresh policies in place for technology. In addition, there may be more stringent finance and accounting rules regarding technology products and services purchases. As the IT decision maker, you should be aware of these policies, which may prohibit you from deciding to finance a large technology purchase for more than 12 months.
However, for these technology purchases, the OEM may also offer an interest-free FMV lease. This style of lease is much more difficult to deconstruct than the example above, as referenced in the post on understanding your lease payment, because in an FMV lease you're financing the fair market value, not the residual value, of the leased product/services.
A 0% interest FMV lease is complicated for two reasons: First, the lease term is usually locked somewhere between 24-36 months, and secondly, the residual value of the leased products will be higher than normal. It may be difficult to compare an OEM's 0% interest FMV lease with a bank or leasing companies' FMV operating lease.
The best place to start is to compare your estimated monthly payment from the OEM and another potential leasing partner. If you are interested in the mechanics of how the OEM is calculating your lease payment, do not hesitate to ask questions — they should be more than happy to discuss your money factor, credit worthiness, and the product's residual value.
OEM programs for 0% FMV leases tend to be very strict: the term is fixed, the money factor is fixed, the residual value is fixed, and your organization must have very good credit. There is, essentially, a "magic formula" that the OEM is using to come up with a 0% interest FMV payment — the manufacturer is getting aid from controlling the cost of their equipment, which they clearly get at a lower cost than anyone else, (also referred to as "blind discounting"). The interesting part here is that if you try to use the same lease factor against equipment not produced by this OEM, it cannot be done at the proposed rate.
The good news is that your organization will get a low monthly payment for a short-term operating lease. However, deviating from that "magic formula" by adding products not manufactured by this OEM, will likely result in additional interest charges. This points to one benefit of using an independent lessor — the lease factor will be more consistent across all equipment platforms.
Summary
Interest-free leasing is an option that OEMs use to provide their customers with additional product discounts. While each OEM has their own approach, there are a few basic styles of 0% interest leases. Make sure that you carefully weigh your leasing options, especially if your organization already has a preferred lease partner.
Has your organization taken advantage of interest-free OEM leases? Would any information here have caused you to consider a different path?
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 Scheduling
- 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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