The Decision to Lease or to Buy

  February 7, 2013

  Read Time: 2 min 00 sec

A customer’s decision whether to lease or to buy equipment should involve much more than simply crunching numbers.

When presented with the option of whether to lease or purchase a piece of equipment many customers turn to their accountants, who in turn apply a fairly standard lease/purchase analysis to the transaction. This approach takes all the financial variables involved in an equipment lease and crunches them in relation to the variables included in a purchase option.

For example, the factors needed to evaluate a lease would include any upfront payments or security deposits, the monthly payment, the residual value at the end of the lease, the term of the lease, as well as a discount rate that reflects the present value of money. The purchase analysis would typically include the down payment, the resale value of the equipment at the end of the note, the term and the interest rate.

This type of analysis is intended to provide clear financial justification for the lease or purchase decision. The standard logic is that by reducing the decision into purely financial terms, the correct decision becomes self-evident. When the calculation is complete and reduced to one number, the theory is that the lowest number – for either leasing or buying – represents the logical choice to acquire the equipment.

The problem with this approach is that if a customer applies this basic accounting approach to the lease vs. buy decision, they will not be able to take advantage of many of the benefits that apply to leasing. These benefits are real and deliver significant value, even if they are not completely quantifiable in terms of a formal financial analysis.

Before we get to the non-financial benefits of leasing, one set of variables that should always be included in a typical lease vs. purchase analysis are the tax benefits that are realized by a customer in an equipment lease. Even though tax benefits tend to change – at least to a degree – from year to year, at least for tax year 2013 those benefits are significant.

Beyond the purely financial approach to the lease vs. buy decision, it’s important to assess all of the benefits that accrue to a business when equipment is leased. From the equipment vendor’s perspective, it is important to understand and convey these benefits to customers considering the leasing option, primarily because an equipment lease also provides tremendous value to the equipment vendor. In many cases, the equipment vendor will derive much more value from an equipment lease than from an outright sale of the equipment.

One of the biggest benefits of leasing is convenience in the form of simplified bookkeeping and asset management. A lease is extremely convenient because everything necessary to bring the equipment online can be rolled into the contract. Consumables, service, support and maintenance, installation and training and any other upfront or ongoing expenses can typically be included in the lease program. The customer can budget for one comprehensive, fixed monthly payment instead of worrying about unexpected charges throughout the usable life of the equipment. This makes the cost of ownership both predictable and manageable instead of random and out of control.

Another valuable advantage of a lease is the ability to take advantage of equipment updates and upgrades. If the manufacturer comes out with a new line of equipment that includes enhanced features and benefits, it’s a very straightforward process to upgrade a lease in order to acquire the upgraded equipment. On the other hand, owning equipment makes it far more difficult to upgrade since it must be traded in or sold, often well below book value, not to mention the “hassle factor” of trying to sell used equipment. The equipment refresh provision in a lease is a very important selling point, since a large percentage of leases never even make it to full term because new equipment is acquired before the lease ends.

On the vendor’s side, the benefits of leasing are just as compelling. The need to discount the purchase price is eliminated and the total transaction value is optimized since everything can be included in the package. This protects the vendor from competitors seeking to sell the customer add-on products and services even if they didn’t get the initial equipment sale. A comprehensive lease program also tends to create a bond between the vendor and the customer that strengthens over time and yields many ongoing opportunities for additional revenue. And when it’s time for new equipment, rolling an existing lease over into a new contract is an easy process.

When evaluated from all angles, the leasing option is almost always the best approach for acquiring new – and in some cases even used – equipment, software and related supplies and services. The customer gets tremendous flexibility in terms of payment structure, technology refresh and end-to-end support throughout the equipment lifecycle. The equipment vendor can build a strong customer relationship that grows even stronger over time, in addition to preserving margins and maximizing transaction revenue. Leasing represents a win-win for both the customer and the vendor and should be offered as a financing option in every customer proposal.

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