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Buying Versus Leasisng Office Equipment
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Determining
the best option depends on the equipment.
By Liese Hutchison
Almost everything can be leased today. From earth-moving equipment
to luxury cars to phones, in 1999 alone approximately $226 billion
worth of equipment was leased, according to the Equipment Leasing
Association.
Items mostly
leased: printers, copiers, fax machines and scanners. Chuck
Donnelly, president of Professional Office Environments, says
his company’s POE Documents Centre division, a Xerox sales agency,
leases equipment to 90 percent of its clients. “In the office
equipment side of our business, leasing is a preferred financing
solution,” he notes. “Most companies don’t want to invest hard
dollars in technology, because they know technology changes
so rapidly and they want to be able to use the equipment as
opposed to owning it.” Professional Office Environments was
founded in 1988 and employs 45 people in St. Louis.
Randy Young, president of Datamax Office Systems, says a company
typically leases an item it thinks will have value when the
lease expires. “Will this machine meet our needs three to five
years down the road?” he advises clients to ask. Young notes
that most companies purchase computers because the computers
probably won’t have any value at the end of the lease. “Computers
can become obsolete quickly. Very few companies will put a residual
value into a computer.” Datamax was founded in 1955 and is headquartered
in St. Louis. The company’s 400 employees are located here,
in Dallas and in Little Rock. Datamax provides office technology
including networks and network support as well as office equipment.
If a company leases, for instance a copier, Young notes that
it will probably lease a new copier at the end of the agreement
instead of purchasing the copier it leased because of the move
from analog to digital technology. “About 10 percent of our
customers purchase equipment out right after the lease is up,”
Young says. Datamax is a Cannon authorized reseller. Approximately
85 percent of the company’s faxes, copiers, printers and scanners
are leased.
Donnelly notes that the leasing again a new technology is popular
instead of purchasing the equipment because of maintenance expenses.
“The more modern equipment has lower maintenance costs, it is
more efficient. You’re probably better off leasing the new technology
because of higher quality and lower operating costs,” he says.
What about office furniture? Donnelly says that the furniture
side of Professional Office Environments sees its lease percentage
the exact opposite of the Documents Centre side. “Ninety percent
of our customer do prefer the purchase option of furniture,”
he notes. “Because it is a low-tech product, people tend to
keep furniture for several years. When the company tires of
the furniture or it’s not functional for them, they’ll send
it to another branch, trade up or sell it.”
Younger companies like to lease equipment because cash can be
reserved. “We find that companies that are two to five years
old, because of a lack of capital, prefer the option of leasing
if they’ve been in business long enough to establish credit,”
Donnelly says.
Leasing also offers tax benefits. Every company’s tax liabilities
are unique and Young encourages each organization to check with
a tax advisor before leasing. Donnelly points out that if a
company does lease office equipment the tax benefit is that
the lease is listed as an operating expense, not a debt, thus
resulting in immediate tax benefits versus amortization of equipment
over several years.
What are
the Benefits of Leasing?
Leasing offers numerous advantages over other
financing methods:
Tax treatment. The IRS does not consider
an operating lease to be a purchase, but rather a tax-deductible
overhead expense. Therefore, you can deduct the lease payments
from your corporate income.
Balance sheet management. Because an operating lease is
not considered a long-term debt or liability, it does not
appear as debt on your financial statement, thus making
you more attractive to traditional lenders when you need
them.
100% financing. With leasing, there is very little money
down—perhaps only the first and last month’s payment is
due at the time of the lease. Since a lease does not require
a down payment, it is equivalent to 100 percent financing.
That means you will have more money to invest in revenue-generating
activities.
Immediate write-off of the dollars spent. Therefore, the
equipment does not have to be depreciated over five to seven
years.
Flexibility. As your business grows and your needs change,
you can add or upgrade at any point during the lease term
through add-on or master leases. If you anticipate growth,
be sure to negotiate that option when you structure your
lease program. You also have the option to include installation,
maintenance and other services, if needed.
Customized solutions. A variety of leasing products is available,
allowing you to tailor a program to fit your month-to-month
or year-to-year cash flow needs. You are able to customize
a program to address your needs and requirements—cash flow,
budget, transaction structure, cyclical fluctuations, etc.
Some leases allow you, for example, to miss one or more
payments without a penalty, an important feature for seasonal
businesses.
Asset management. A lease provides the use of equipment
for specific periods of time at fixed payments. The lessor
assumes and manages the risk of equipment ownership. At
the end of the lease, the lessor is responsible for the
disposition of the asset.
Upgraded technology. If the nature of your industry demands
that you have the latest technology, a short-term operating
lease can help you get the equipment and keep your cash.
Lease equipment that you expect to depreciate quickly. Your
risk of getting caught with obsolete equipment is lower
because you can upgrade or add equipment to meet your ever-changing
needs.
Speed. Leasing can allow you to respond quickly to new opportunities
with minimal documentation and red tape. Many leasing companies
approve your application within one or two days and you
can have your equipment very quickly.
Lower payments than a Loan.
Improved Cash Forecasting. The lessee knows the amount and
number of lease payments, so he can accurately forecast
the cash requirements for equipment.
Flexible end-of-term options. Return, renew or purchase.
ax Benefits. Lessors can pass the tax benefits of ownership
onto the lessee in the form of lower monthly payments
TImproved Earnings. Operating lease accounting provides
a lower cost than a capital lease in the early years of
a lease.
Source: Equipment Leasing Association
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Liese L. Hutchison is an assistant professor in the department
of communication at Saint Louis University and a free-lance
writer.
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