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To Buy Or Not To Buy?

Purchasing isn't the only option when your company needs new equipment.
January 1, 2001
URL: http://www.entrepreneur.com/article/35652

Steve Dennen recently found himself in a sticky situation many businesses face when they move. Despite lots of number crunching, it was hard for his accounting firm to determine the total moving budget, including office renovation. When Dennen considered his options for a high-tech phone system, he decided to head down a path many entrepreneurs are choosing to take these days: leasing equipment. "We were moving and didn't have a [fixed] budget," says the 47-year-old co-founder of Kenney, Dennen, Lague P.C. in Andover, Massachusetts. "Leasing gave us the flexibility of not having to purchase the system upfront, and it was easier than getting a loan."

Although Dennen had previously leased equipment for his 6-year-old business, he felt encouraged to do so again when he listened to his clients share positive stories about how easy it was to lease. Dennen made the experience a little different this time by going online to take care of the entire leasing arrangement. Whether such transactions are done online or offline, eight out of every 10 businesses currently lease instead of buy equipment for their offices. And, according to the Equipment Leasing Association of America, telecommunications and computer equipment have taken the lead for the fastest-growing sector of equipment leasing.


Mie-Yun Lee is the founder and editorial director of BuyerZone.com, thew Internet purchasing hub for small business. Diane O'Brien contributed to this article. For more information on equipment leasing, log on to www.buyerzone.com/finance/leasing/index.html

Why The Growth?

Regardless of industry or business size, technology-based equipment-computers, multifunctional devices, fax machines, copiers, phone systems-is a must-have for practically every business. The high price of technology equipment usually prevents most businesses from purchasing it outright, and many entrepreneurs aren't interested in spending enormous amounts of money for equipment that could become obsolete in just a matter of months.

In Dennen's case, leasing offered more flexibility than a loan. Loans are certainly the way to go if you want to eventually own the equipment and are comfortable with the in-depth approval process and down payment required. But considering the twists and turns businesses are bound to experience, having to make loan payments on equipment you don't use anymore when your business changes is the last thing you really need.

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.

Making The Choice

Sure, leasing IT equipment can potentially save you headaches, but is it all sunshine? Arentsen's July 2000 report on the IT leasing industry points out many advantages to leasing IT equipment, but it also sheds light on some drawbacks.

For instance, once you sign your name on the dotted line, you're locked into that lease. If you realize you aren't really using the equipment and determine you just don't need it, you still have to pay. (When you cancel a lease, you usually end up with stiff penalties.) Drawbacks can also hinge on the specific piece of equipment you're interested in leasing.

Case in point: Dennen says he's been happy with his lease and his relationship with OneCore. He admits he won't consider leasing equipment such as PCs, however. While he believes his phone system will suit his company's needs just fine when the lease reaches its end, Dennen doesn't want to run the risk of having outdated computers in his office. "Even with a two-year lease, PCs may be obsolete by that time. It makes more sense to us to purchase the PCs and use a program, like Gateway's, where we can trade them in toward a new purchase in a year or so," he explains.

As equipment leasing earns its reputation as the "road most traveled," you'll probably discover that it beats purchasing when you need to get new technology-based equipment for your company. But despite Dennen's positive experience and leasing's growing popularity, you should always measure the pros and cons of leasing for each piece of equipment you're considering. Whether you lease or buy, or come up with a combination of both options that gives you the best of both worlds, the way the puzzle fits together is different for each business.

Speak The Lingo

$1 buyout lease: At the end of the lease, you can purchase the leased equipment for $1. Your monthly payments will be higher in this case.

Deferred payment lease: A payment schedule that allows you to defer your first payment by 60 or 90 days. This is an example of the flexibility leasing offers.

Economic/useful life: The time period during which equipment will retain value. Most high-tech equipment has an economic life of no more than five years.

Equipment schedule: A document provided by a lessor detailing the terms of the lease, your payment schedule and the equipment being leased.

Fair market purchase option: At the end of your lease, one of your purchasing options is to buy the equipment at its fair market value.

Master lease: If you already have a lease in place and want to lease additional equipment, you can avoid negotiating a new contract by using the same terms as on your initial lease, making it a master lease and saving you time and money.

Modern equipment substitution: A provision that can be negotiated into your lease so you don't end your lease when the equipment becomes outdated, but rather have it replaced with newer equipment during the lease term.

Purchase option: A provision written into the lease that gives you the option of buying the equipment at the end of the lease. The price can be the fair market value, or you can decide on a price when you negotiate your lease.

Residual value: The value of your equipment at the end of a lease.


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