Love It, or Lease It

By SmallBusinessComputing Staff | Posted March 01, 2000
by Michele Marrinan

When it comes to tech purchases, few questions create a bigger dilemma than "Lease or own?" After all, tech prices have been dropping precipitously, making previously unaffordable equipment well within the reach of most businesses. But when you consider the rapid devaluation of all things techie, is it really worth plunking down all that cash for something that will be obsolete in a matter of years if not months?

Understandably, business owners are confused on this issue. Quick calculations reveal that leasing costs more in actual dollars than buying out-right, but the benefits of having the most up-to-date equipment and increased technical support often more than make up for the additional costs. Experts say that growing numbers of small business owners are choosing to lease, rather than buy, business equipment. They add, however, that leasing is not for everyone. Here's how to decide what's right for your business:

Figure you out what you need
An e-commerce business may need the latest and greatest technology, but an accounting firm can probably get away with technology that's two or three years old. Kevin Burden, a senior analyst in asset management services at IDC in Framingham, Mass., says a business owner must balance the economic and technological lives of a PC when deciding whether to lease or purchase. The economic life begins to ebb when maintenance costs more than the PC is worth. The technological life ends when that PC can no longer perform necessary functions.

"Leasing gives companies flexibility to manage both those lives," says Burden. "Small business owners are leasing for two-and-a-half, three years tops. Leasing allows them to stay current with technology." But keep in mind that buying may make sense for equipment that holds its value for more than a year or two.

Crunch the numbers
Leasing is fundamentally a financial decision. Look at the initial cash outlay and the finance charges of a leasing arrangement. Then compare that to buying outright. The total cost will always be higher in a leasing arrangement. How much higher depends on the interest rate the customer is able to secure. While most vendors are reluctant to quote interest rates before a candidate is approved, many offer rates that rival those of credit cards ­ or better. Most leases give customers the option to purchase the equipment at the contract's end for a minimal charge.

Check cash flow
Some businesses, particularly retail establishments, need easy access to cash. For those businesses, leasing may be a good option because of the small initial cash outlay. Most equipment manufacturers don't even require a down payment.

"Customers in this marketplace usually are growing fairly rapidly, and that means they may be strapped for cash," says Paul Crescenzo, executive for IBM Global Finance's Very Small Business Financing for North America. "Leasing will provide the obvious benefit of monthly payments instead of a big cash outflow. That frees up cash for other purposes, such as expanding their employee base. What leasing will do is provide them with a cost-effective ability to get the use of the equipment quickly without damaging or impacting their cash flow for their core business."

Keep it simple
Does the thought of going through the lease-approval process send you into a cold sweat? Don't worry. Today's leases are designed to cause minimal aggravation. IBM, for example, has pared its application, approval, and contract process down to 15 minutes. The agreement, which can include non-IBM components, can be completed through a reseller at the time of purchase. The contracts themselves are written in plain English. Pitney Bowes has also streamlined the process by reducing the paperwork required for its Smart Business Lease and Value Lease.

Leasing can also simplify tech support. Many items on lease are also on a strict maintenance schedule. Technicians come to the office periodically to check and clean equipment and to make sure everything is in working order. This "preventative care" can even head problems before they strike ­ and before they put a halt to work flow.

Consider disposal costs
One of the reasons car leasing has become so popular is that buyers don't have to deal with selling a car several years down the road ­ they simply trade it in for the latest model. The same can be said for technology purchases. IDC's Burden points out that disposing used PCs is no picnic. You can sell them to employees, donate them to charity, or just throw them out. But any of these alternatives can be costly. When leasing, however, it is the leasing company's responsibility to dispose of the equipment.

"More often than not, the cost of disposal exceeds the worth of the PC," says Burden. "What people don't prepare themselves for is what's going to happen at the end of the life cycle of these PCs. You have to come up with your own strategy for disposing them. With leasing you don't have that. It becomes someone else's problem."

Run a personality check
Personality typing may sound like a bunch of psychological mumbo-jumbo, but it can actually be a useful tool in determining which financing option is right for a particular business. While entrepreneurs may exhibit many of the same characteristics ­ drive, creativity, dedication, to name a few ­ they are anything but identical. And the way the business is run is affected by the attitudes and behaviors of the owner.

That includes leasing. A recent Pitney Bowes study, "Attitudes and Behaviors that Create Small Business Success," queried more than 1,400 small companies about their optimism, staffing concerns, financial risk tolerance, personal involvement, innovative nature and technological know-how. Forty-six percent of the respondents are concerned about keeping up with technology, and each personality type ­ the study found five different personality types of business owners ­ deals with that concern differently.

"Jugglers," who tend to do everything themselves, are strong lessors because they need the cash to grow their companies. "Idealists" work at something they love and leverage technology to handle the mundane tasks, and most idealists choose to lease. "Hard workers" choose to pay cash along their steady paths to increased revenues and a larger workforce. Confident and savvy "optimizers" like the control that buying outright affords them. "Sustainers," who strive to balance life and work, also prefer to pay cash for technology purchases.

The terms may sound a bit hokey, but the study makes a valid point. It's important to figure out what type of entrepreneur you are and what kind of financial arrangements you'll be most comfortable with before you make the decision to lease or buy.

Michelle Paster, president of LearningWorks Inc., an educational therapy consultancy in Newton Centre, Mass., fits easily into the category of sustainer. "I needed such a small amount of equipment that it didn't make sense to lease," says Paster. "I didn't want another monthly bill. I'd rather lay it out at the beginning than to hit my ongoing cash flow."

Mike Brown, and his two partners at Cyber-NY, a full-service interactive design agency in New York City, examined their technological requirements, ran a personality check and found that buying works best for them. But, when you look at the computers they buy, Cyber-NY certainly classifies as a unique case.

"I never like to give up a Mac," says Brown. "I even collect old ones. They run for a long time and they hold their value. In the early days, Apple came out with some really quirky machines. So I go to thrift shops and buy them for $20. Every one of them, you plug them in, turn them on and they boot up."

Needless to say, Brown and his two partners don't lease any of the Macs they use in their full-service interactive design agency. If they worked on PCs, which change at breakneck speed, leasing would make sense for their seven-person operation, says Brown. But they don't. So Cyber-NY confines its leasing activities to a Pitney Bowes postage meter.

The decisions to buy was an easy one for both Paster and Brown. But many businesses make the decision to lease with the same ease. A close examination of finances, technological requirements, and personality should help you decide which option is right for you.

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