Should you consider leasing? It could help your firm meet computing needs

Black Enterprise, Dec, 1995 by Fonda Marie Lloyd

Your business is booming, you've hired new employees, but your computers run slowly and you need to go multimedia. How can you update your equipment without spending next year's profits? Leasing might be the answer. "People turn to leasing because it allows them maximum flexibility in the marketplace," says David Poisson, executive director of the Computer Leasing and Remarketing Association in Washington. Of course, his view may be biased. In reality, taking advantage of leasing's flexibility depends upon your company's cash flow needs, your need to have the latest equipment in order to compete and your ability to negotiate.

"The decision to lease should be made from an accounting and financial tax point of view," says Herb Houser, president of Barnes Wentworth, a New York-based technology consulting company. Leasing provides a financing technique to get the equipment you want with little cash outlay. When you lease, you pay for the equipment for a specified time period only, avoiding the burdens that go with long-term ownership.

Experts advise firms to do a purchase vs. lease analysis to determine the most cost-effective way of acquiring equipment. Many different software programs, such as SuperTRUMP by Orinda, Calif-based Ivory Consulting Corp., can help you, or you can have your financial advisor do the analysis.

Companies with budget restrictions or other pressing needs for their capital are good candidates for leasing. Leasing may be attractive to these firms because it preserves working capital for the present. However you will probably end up paying more in the long run for leased computers than for those you purchase outright. Companies looking to pay the least amount overall for their computing needs might want to just buy their equipment.

Leasing vs. buying has different tax benefits for businesses. As a lessee, you can write off the entire amount of the payment. But you lose the ability to resell the equipment, which can offset some of your yearly equipment expenses. If you purchase the equipment, you can depreciate the cost over five years, or deduct up to $17,500 the first year and the balance over time, says Kevin M. Coleman, owner of Coleman & Coleman, a Culver City, Calif.-based CPA firm. However, you lose the depreciation deduction if your company carries losses forward on its tax returns.

Some argue that leasing provides the benefit of avoiding obsolescence. Leasing works for companies wanting to stay in step with changing technology or get ahead of the competition. "At the end of the [contract], the equipment turns back to the leasing company," Houser says. Three-year leases make the most sense, he points out.

Richard Contino, author of Negotiating Business Equipment Leases (McGraw-Hill, $39.95), contends that using leasing to prevent obsolescence is "a fallacy." He notes, "Lessors build the cost of obsolescence into their pricing," because they "are not going to take an equipment value risk."

Once the decision to lease has been made, there are various places to look for lessors, including the Leasing Source-book by Bibliotechnology Systems and Publishing Co. Another source is the Computer Leasing and Remarketing Association. The association publishes a directory of its members and lists the types of machines they specialize in. All the members are certified by the association.

But beware. The $21.4 billion computer and telecommunications equipment leasing industry has little government regulation. As with any large purchase, do your homework, then negotiate the best deal for your company. And Poisson adds, "Decide how you want your company to grow and what computers can do to help you get there."

There are several kinds of leasing firms. Dealing with each type of lessor has its advantages and pitfalls. "Some are like used-car salesmen," says Contino. "It's a `buyers beware' market. Many lessors want to get what they can from you."

Captive leasing companies are an arm of the manufacturer. They can offer lower rents and the flexibility of upgrades. Unfortunately, the company's real aim is to sell you the computer. They often won't offer you the best deal if they think you can afford to purchase the equipment.

Independent leasing companies buy equipment from the manufacturer and lease it out to you. If pushed by a savvy negotiator, they will wheel and deal with the lessor. However, if you're not savvy, they'll cut the best deal for their firm, not yours.

Lease brokerage firms generally don't have the capital to buy the computers they lease. Instead, they arrange a price with you and then find someone else to lease them to you. Sometimes they will find the best deal in the marketplace for you, but if they can't, all you'll have is the paper you signed the lease on.

Bank-affiliated leasing companies operate through a bank and are regulated by the government. They may be the fairest of the leasing companies, and they always have money to finance the deal. However, because they are regulated, they tend to be less flexible with lease terms.