Tips for Buying Tech in a Recession

By Brian T. Horowitz | Posted December 04, 2008

In difficult financial times, what makes more sense for cash-strapped companies: buying IT equipment outright or leasing and spreading the payments out over time? Many small businesses lease from providers such as Office Depot, Dell or CDW in order to save some cash and still keep their technology fresh.

Still, not everyone sees this economic climate as conducive to leasing. According to Ed Lukens, a spokesman for Micro Center, an online computer and electronics store, the company's leasing program is a very small part of its business

"The credit crisis means banks are unwilling to lend money to leasing firms," Lukens explained. He said that with the cost of borrowing going up, leasing firms have more stringent requirements on credit scores. "With fewer customers qualifying for leases, leasing will decline," he predicted. Also, less-advantageous leasing terms mean that some credit-worthy customers will buy products outright instead of leasing.

Vendors such as HP see things differently. "Leasing is always a sound approach for small businesses to manage their IT infrastructure, regardless of whether the economic picture is sunny or gloomy," said Michael P. Cuno, a spokesman for HP Financial Services. HP provides a helpful summary of how leasing works on its Web site.

At CDW, Gerry Singson, small office segment manager, acknowledged that credit is harder to come by of late. "We’re noticing that access to credit has become a challenge for many small businesses as the availability of traditional start-up sources such as SBA loans and home equity loans has tightened," he said.

However, Singson added that while they expect that the demand for credit will decrease due to a slowing economy, they also expect that "many small businesses will turn to commercial credit sources, including leases, to support their business needs."

Robert Dunlap, divisional merchandise manager for services at Office Depot agreed that it's a tough climate for securing traditional credit. "More people are looking at leasing as an option and a tax-deductible operating expense for businesses. It won't impact your ability to get credit," he said.

Customers can lease equipment they need for their business, Dunlap said, including computers, printers, routers, office furniture ‑- even paper and cartridges. He added that a typical lease term runs for 36 or 48 months.

Asset management, the ability to have the latest equipment and a desire to lower costs are the key reasons small businesses lease IT equipment, according to research by the Equipment Leasing and Finance Association (ELFA).

Conserve Cash

According to HP, leasing is attractive because small companies lack the funding of their large competitors. "Most small and midsize companies have to manage their cash flow very, very carefully," said HP Financial Services' Cuno. "Few are flush with cash."

"Leasing is a countercyclical business strategy: As the economy goes down, leasing goes up," Pucciarelli said.

Dunlap said Office Depot rolled out its SmartWayLeasing program in Florida and Texas stores in November and will take it nationwide in the first quarter of 2009. Leasing provides another way for small businesses to acquire equipment when cash is tight, he said.

"If you have $5,000, you can buy three systems and lease nine," said Jennifer Davis, a spokeswoman for Dell. "A lot of people want to own their equipment outright, but it certainly is an advantage to them to keep their technology fresh and extend their dollars," Davis said.

IDC's Pucciarelli said that although the economic climate is uncertain for the next 24 to 36 months, he foresees an expansion of "point-of-sale leasing" for small businesses. "Leasing provides a means for an alternate supply of capital without having to tap normal lines of commercial credit or revolving credit," Pucciarelli said.

Back at CDW, Singson talked specifics about year-end tax advantages. "The 2008 Economic Stimulus Act allows a one-time 50 percent special depreciation deduction on products purchased before Jan. 1, 2009," he said. "The Stimulus Act also allows lease payments for technology solutions to be made on pre-tax rather than post-tax earnings."

Keep Your Tech Fresh

Experts say another advantage to leasing is the ability to refresh your technology on a regular basis.

"When companies think of their IT equipment acquisitions like a utility bill ‑- something they pay every month ‑- it puts them in a position where they can afford the best technology available," Lee Eberding, director of the small- and medium business segment for HP Financial Services, said in a statement. "Even better, your monthly payment may not change much because the price of most IT equipment is flat or declining."

Jennifer Davis at Dell agreed. "It helps small businesses keep technology fresh," she said. "At the end of your lease you can trade in your equipment for the latest and greatest technology."

Know the Terms

IDC's Pucciarelli says an essential step for a small business in securing an equipment lease is examining the exact terms and conditions. For instance, some companies let you purchase the equipment at the end of the lease for $1 or fair market value. (PC vendors such as Dell and HP offer both options, while Office Depot offers the option to buy at fair market value.)

"Small businesses need to have a understanding of how the vendor determines fair market values," Pucciarelli explained. "If the contract doesn't say, then that's not a good sign."

"The amount you pay for leasing is much lower when the fair market value is a purchase option," Pucciarelli added. "A lease with the option to buy for a dollar is basically a loan, paying the full price of the purchase."

Brian T. Horowitz is a freelance technology writer based in New York. He has written for publications such as Fast Company and USA Weekend, and writes a blog about innovation at InternetNews.com.

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