Tech equipment–computers, IT equipment, and related items–poses some unique issues for businesses attempting to decide whether to lease or buy. Tech equipment becomes obsolete faster than almost any other type of equipment, making it an undesirable long-term investment. At the same time, many companies have to keep their tech hardware up-to-date to be able to remain competitive.
Should you purchase or lease your tech equipment? Read on.
How Does IT Equipment & Computer Leasing Work?
The word “lease” is often related to rental agreements — like the ones you sign whenever you rent an apartment or lease a brand new vehicle. While those examples would be the most typical, the term is continuing to grow to encompass a number of other types of agreements.
Capital VS Operating Leases
While you will find an enormous number of lease types with names like “triple buyout lease” or “synthetic lease,” almost all of them fall under two major umbrellas: capital leases and operating leases.
A capital lease encompasses leases like conditional sales agreements as well as $1 buyout leases and $10 buyout leases. A capital lease transfers ownership of the item under consideration for you, the lessee, either immediately or early during the lease’s terms. For those intents and purposes, the item is recognized as yours–it’s a good thing on your balance sheet. When compared with operating leases, you’ll have higher monthly obligations but a much smaller residual payment at the end of your lease (hence the $1 buyout, for example). You rarely, when, get the chance to come back the equipment after your lease. And why would you? You’ve already taken care of its entire value, plus interest. If this sounds similar to financing, it ought to. You’d essentially make use of a capital lease as an alternative to a tool loan.
Operating leases are more traditional leases. Actually, they’re sometimes called “true leases.” With an operating lease, the leasing company retains ownership from the equipment while you’re giving operating rights to it. This means the equipment is recognized as a practical expense for your business, as opposed to a purchasing expense. The most common type of operating lease may be the fair market price lease (FMV). Typically, monthly payments is going to be lower with operating leases, but the amount remaining at the end will be larger. Operating leases usually give you the option of giving back the equipment towards the leasing company at the end of your lease. You might also need the option to purchase it because of its fair market value price, however in most cases, you’d need to be having a capital lease if you prefer to keep your equipment.
Buyout Agreements
If a lease includes a buyout option, that means that you will find the choice to purchase (buyout) the equipment after your lease. Many types of leases are named for that terms of the buyout. For instance, a good market value lease grants the option of purchasing the item at its fair market price. A $1 buyout lease? You guessed it; you can purchase the equipment for a dollar at the end of your lease.
Why the large difference in buyout amounts? Remember, a capital lease frontloads the price of the gear to your monthly payments. The $1 residual is essentially just a formality; you’ve already paid for the product. On the other hand, by having an FMV lease, you’ve only been renting, therefore the cost to buy is based on exactly what a used piece of equipment that age would cost available on the market.
There are a lot more obscure kinds of lease agreements that you may run into, but generally speaking, you may expect capital leases to have small, insignificant residual payments and operating leases to possess larger, more significant ones.
Common Lease Terms
Equipment leasing has a large amount of jargon. Let’s demystify some of it.
- Lessor: The company financing your lease. Think “lender” however for leases.
- Lessee: The company or person detaching the lease. Think “borrower” however for leases.
- Term Length: The period of your lease. An average tech equipment lease may run anywhere from annually to 5 years. The longer your lease, the greater expensive it will be in most cases.
- Interest: The amount you’ll pay more than the need for the equipment. Rates usually start around 6% and top in the high teens, though some might be higher depending on your credit, the lessor, and also the type of lease you decide on.
- Fees: These vary by lessor and state. They might include supplemental charges like administration, restock, insurance, and origination fees.
- Monthly Payment: The amount of cash you’re likely to pay your lessor each month.
- Residual: An amount necessary to purchase the leased equipment at the end of the lease. In most cases, the lower your payment per month, the higher your residual, and vice versa. Capital leases have lower residuals than operation leases.
Leasing VS Buying Computers & IT Equipment
So why would you lease tech equipment rather than buying it? Let’s take a look at some of the advantages and disadvantages of leasing tech equipment.
Advantages Of Leasing
- Easy Upgrading: Tech equipment becomes obsolete quickly, which can make it a poor longtime investment. A practical lease may allow you to stay up-to-date around the most advanced technology without having to re-purchase every few years. It will help smaller businesses take care of the technological curve.
- Smooths Out Cash Flow: Breaking the cost of your equipment down into predictable monthly obligations has its own advantages, even if you are paying more with time.
- Shipping & Installation Might be Covered: Unlike business loans, leases more often cover the full cost of factory-to-operational expenses.
- No Down Payment: With the possible exception of getting to create the first month’s payment up-front, the entry costs of a lease tend to be very low.
Disadvantages Of Leasing
- More Expensive: Between interest and costs, it’s virtually guaranteed that you’ll be spending more money around the equipment than you'd if you have bought it outright.
- You Can’t Easily Resell: If you need to offload your equipment before your lease has ended, you might encounter some legal complications. Be sure you know your lessor’s policies before you try to transfer ownership to some third party.
- Legal Complexity: There are a lot of various kinds of leases with a lot of different rules. May be the item an asset or an operating expense? Well, that will depend on the type of lease you have! Are you responsible for maintenance and maintenance, or perhaps is the lessor? Again, it depends on the kind of lease you've.
- You Need A good credit score: Given the responsibilities that come with leasing, most lessors need to see a solid credit score
Advantages Of Buying
- Tax-Deductible: As a business owner, you can write newly purchased equipment off of your taxes.
- Cheaper: It’ll be considered a bigger expense in advance, but within the longterm, you’ll have saved a good bit of money.
- The Devices are Definitely Yours: Want to resell, modify, lend it for your cousin in Tallahassee, or smash it having a sledgehammer? You are able to! (Check your local laws regarding e-waste, though, if you take the smashing option.)
- Less Complicated: Buying is straightforward. You exchange currency for ownership of the item. There’s not much small print to sift through.
Disadvantages Of Buying
- You Need Money on Hand: Buying means paying the price of the gear all at one time. That means you have to have a decent slice of cash in your reserves — or perhaps be willing to remove a loan. This can be a big ask for businesses that run on thin margins.
- You’ll Be Tied to Obsolete Equipment: Tech equipment isn’t the very best long-term investment. Eventually, you’ll be stuck with obsolete gear that isn’t easy to eliminate. And on that note…
- It Depreciates Quickly: Ever tried selling your iPhone four years after you got it? Tech moves quickly.
Computer Leasing VS Buying: Which Is Better For Your Business?
There are advantages and disadvantages to both buying and leasing computers also it equipment. Consider leasing equipment with a high turnover rate should you work in an industry where being on the bleeding edge is advantageous. On the other hand, for those who have modest tech needs and can comfortably make use of the same gear for over 5 years, it may be preferable to simply simply purchase the equipment you need. There are additional considerations for businesses trying to smooth out their funds flows or else apply their limited resources to maximum effect.
Don’t have the funds to purchase outright but aren’t sure if a lease fits your needs? Consider an equipment loan. Not sure where to search for equipment financing? Check out our Best Equipment Financing Companies. Just starting out and want equipment for the office? Try our guide on how to Get The Equipment You'll need For the Startup Business Having a Loan Or Lease.
