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To Buy Or Not To Buy?

Just Your Type

There are two primary types of leases: operating and finance. The one that's best for you clearly depends on your goal.

Operating leases typically last no more than five years. As a rule, they're shorter than the life of the equipment, because the lessee doesn't buy the equipment at the end of the lease but instead trades it in for a new piece-making this a popular choice for high-tech equipment leasing. Finance leases usually result in the lessee buying the equipment when the lease is up. These leases are typically spread over a longer period of time, which reduces the monthly payments. Although operating leases usually work better for businesses renting high-tech equipment, don't disregard finance leasing altogether.

Dennen, who chose a 36-month finance lease in January 2000, plans to buy the phone system at the end of the three years. And he isn't worried about the equipment becoming obsolete. Although phone systems advance with time, he doesn't think his business would actually benefit from more sophisticated models.

David Arentsen, who analyzes the IT equipment leasing industry for ShareMax, a Parsippany, New Jersey, procurement company that provides a technology platform for sourcing, says finance leases have certain advantages. "With an operating lease, you have lease payments every month [indefinitely], which can be downright annoying," Arentsen says, "so consider finance leasing if there's [even] a portion of your business that doesn't need cutting-edge technology." For example, your Web designer may need a PC with the latest processor, but an employee who simply needs access to databases or word processing applications could get by with an older computer.

Then there are the three types of lessors: captive, independent and leasing brokers. Captive lessors are subsidiaries of manufacturing companies. They own the equipment and rent it out to you. (Dell Computer, for example, is a captive lessor.) Independent lessors buy equipment from different vendors and then lease it to you. You can go straight to these vendors or deal with a lease broker, who acts as a middleman, arranging leases between customers and leasing providers that can fill their needs.

Dennen took his search for a lessor online, where he found OneCore, which provides financial services for entrepreneurs and acts as a leasing broker. The ease of being able to handle everything online appealed to Dennen. He approached OneCore with the vendor he wanted to lease from (Moscow Communications), and OneCore took care of the rest. "We were actually a guinea pig for OneCore, as one of its first clients," Dennen says. "All we had to do was tell them the phone system we wanted, and they handled all the details that went into establishing the leasing relationship. It was a quick and easy process."

Arentsen says that no matter what type of lease you choose, you should make sure service comes first. Before you sign your leasing agreement, find out whether the lessor offers 24-hour maintenance with a quick response time (as in hours, not days). He also stresses the importance of choosing an established company with a solid reputation to reduce the chances the lessor will go out of business before your lease runs out. Be sure to check out the Equipment Leasing Association of America (www.elaonline.com) member list. The 800 members follow the association's Code of Fair Business Practices, which requires members to abide by certain stand-ards that keep lessees' best interests in mind.

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This article was originally published in the January 2001 print edition of Entrepreneur with the headline: To Buy Or Not To Buy?.

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