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Is Leasing Really Worth It?
llamaluvr asks: "As I understand it, there are some financial benefits for businesses leasing hardware equipment. Does anybody know what exactly those are, and how much they really help? Do they really outweigh the additional costs of replacing, repackaging, and returning old hardware? How do the size of the business and the computing environment affect these benefits? Additionally, what is the best balance between leasing and purchasing equipment -- would leasing desktops and laptops, but purchasing monitors be best, or should one just lease everything?"
"A little bit of background: I work in the IT Operations department for a BU of a Fortune 100 company, and we lease practically everything right now. We have 4 full-time employees for about 800 workstations, and, while we seem to have enough manpower for managing projects and tickets, we have a tough time getting to returning the equipment, so a lot of it is already late. Complicating this is that many of these PCs are in a harsh industrial environment, and often have at least one failing part, which then costs us a fraction of the entire workstation (for example: a busted floppy might cost us $150 or more, unless we test the PC and replace the part, of course). Corporate has been more attentive to this drain on our time and money lately, and they have talked of outsourcing this process, but in the meantime, we're stuck with it. BTW, we lease IBM equipment through ePlus."
If it was a server, I think a major factor would be how far in advance could you get your boss (if you have one) to buy replacement servers so that you can start migrating the services to the new system. A lot of times, server and service migrations take longer than expected and so you might wind up having buy the server outright at the end of the lease because you aren't ready to migrate yet. Its not like leasing a car (which I do) where you can just take your stuff out, put it in your garage and then go swap cars.
For starters: I assume that you're in the US, but could imagine that some of the tax laws, which apart from keeping your liquidity fluid, but for a price, is about the only fathomable reason why you would want to lease in the first place, differ from state to state.
If it's a matter of keeping your gear in top notch condition and fixed 30 minutes after failure you might be better advised with a support contract including a service level agreement.
Cutting to the cheese: You are better advised to ask your CPA, or if you insist on getting fancy, your tax attourney.
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As I understand it, sin(x) can have values between positive 1 and negative 1. Is my x going to be positive or negative?
A little bit of background: I have a value of x somewhere between 0 and pi.
Snark aside, this really isn't an issue where you should be guided by ancedotal evidence posted to Slashdot. You're working for a Fortune 100 company, for crying out loud--you need a carefully-planned methodology, not a bunch of yammering 'experts' giving you off-the-cuff advice on a very complex problem...
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If you lease, you pay less now. If you purchase, you potentially pay less later. However, there are complications on your taxes for either (depreciation vs. amortization, lease payment costs, etc.) In General, I would expect purchasing to be a better deal unless you are expecting to have high turnover of machines and volatility of business (i.e. contract job only requiring machines for 12 months = definitely lease!)
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When businesses lease equipment, they write-off the whole amount in that tax year. If they purchase equipment, they have to depreciate it over a number of years. With the large amount of IT equipment, keeping track of what was purchased when, and how much has been depreciated is a CPA's nightmare. Thus, the equipment is leased, even if it ends up costing more money to get lesser capable equipment.
Basically, it's because the tax law depreciates most of that hardware over something like 7 years. So in the first year you'll get to write off something like 20% of the value.
With a lease you expense 100% of the amount you pay as soon as you pay it.
This is why a very common option is lease-to-buy with a very cheap buy option at the end of some number of years. This is essentially an apparently legal scam to allow you to write it all off. (It's legal because the leasor really does still own it until the end)
The next-best option is to sell the hardware the day you stop using it, because then you immediately get to write off the difference between the amount you've already devalued it and the amount you actually got for it. Because computers aren't worth anything much sooner than 7 years, you always get a tax benefit when you sell a computer that just became obsolete.
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I can't say that I'd ever consider leasing unless it turned out to be MUCH cheaper. Old hardware can always be reused and/or sold off for temporary budget increases. Not to mention that high-wear equipment like laptops tend to break, thus requiring you to pay for the damage.
That being said, it does have certain political advantages. Having your equipment on lease ensures that the company *must* allow you to upgrade the equipment or go without.
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- Depending on the lease terms, you may simply get replacement equipment once your current is obsolete (e.g. workstation is a couple revs out of date).
- Tax benefits can be dramatic. Speak to your tax accountant / lawyer.
- Depreciation of assets can look very bad on a publicly traded company's books. To avoid this, many public companies lease as much as they can.
- Often leasing means consolidation. In this day of CDW and the like, that's not as big a benefit, but it used to be huge.
There are probably other advantages I'm not thinking of. Of course, the down side is that you can't just treat the hardware as your own. Your developers (if you have any) will be especially displeased to hear that they're not allowed to just slap in some RAM or a hard-drive they had lying around.Leasing effectively moves the value of the leased item out of the Fixed Assets of the balance sheet, reducing the overall fixed assets. This has the result of improving the ratio of asset turnover, a prime measure of business performance. It also has an effect on the operating statement, as it becomes a straight cost. It is a much more transparent way to deal with something that will probably get cycled out within 3 years. As others have mentioned, your tax benefit mileage may vary.
One area where leasing stuff is useful is during lawsuits.
In a smaller company if you lease your office, the furniture, the computer hardware, basically no real assets, when you get sued (which seems to be a when not if thing, in the US market) and if you lose, you have nothing to give up.
But if you want to own the stuff you lease, that's easy too. Just need a second company, company B. Company A leases the stuff from Company B. You own and run company C, which owns and runs companys A and B. This is only a small part of a giant company chain that can exist for several reasons.
One thing I have heard from the hosting group is that when a group buys a server, it's difficult to migrate off of it once the hardware is obsolete. You can't really sell it easily, and who would you sell it to? It still runs, so how do you get the business owner to pony up for newer hardware? Before you know it you're heating the server cage with a half dozen Apollo DN3000's.
When the client is paying hardware rent every month it's easier to say "good news, for the same rent you can get the latest hardware".
For easy management why not try out a terminal server system? The clients can leased easily, and the ease of managment should free up a bit of your guys time. your boss will like it because of the effect on the bottom line.
You can also lease the terminal clents.
They are simple devices, very little to go wrong and drop-in replacement is another advantage.
I'm working on a combo grid/shared memory/terminal server system atm to try and create a distributed destop TS system for our particular setup here.
Terminal servers would be a good option to check out.
--cros13
I am not an accountant (and I don't play one on tv). When you buy, you get an asset. Remember from accounting 101, assets = liabilites + owners equity ?
With an asset, you are then able to depreciate the asset over it's "useful life", say 3 years. After 3 years you cannot depreciate the asset any more, and you still have an "asset". something else to consider when you own, is the cost associated with replacing the equipment. You just can't throw them in the garbage, they need to be "cleaned" and recycled.
Leasing on the other hand falls under "liabilities". All things being equal, more liabilities would make your Owners equity smaller (see equation above), thus resulting in a "smaller" bottom line, thus having to pay less taxes.
There are probably 1000's of other reasons out there as well.
m@t
I am not an accountant, but I am a small business owner so I have some idea about this stuff.
The advantages of leasing are primarily:
1. cash flow benefits
2. tax benefits
One of the primary things that small businesses (well, all businesses, but especially small businesses) have to manage is their cash on hand and their cash flow (when cash shows up, when it leaves) If I have to buy a $3000 server and I pay cash then I need to have $3000 cash right now and that cash goes away. If I lease that server, then I might have monthly payments of $50/month. Over the life of using the equipment I pay more, but at the outset I don't have to have all of that cash around.
Also, when you pay money to buy something of value, for tax purposes you don't take all of that cost off your profit immediately (you pay taxes on profits, not gross income) You have to depreciate it out over a period of time which is supposed to represent the useful life of the equipment. This means that while you might have paid the money out (in cash) you can't claim that they money has all gone away yet for tax purposes. Not fun!
When you lease an item the leasing company owns that capital expenditure and so they depreciate the item. Your monthly payments can be treated as expenses so they come off your taxable profits immediately. Plus you don't have to account for the depreciation, etc.
In my business most of my costs are salaries for my people, not workstations for them to use so workstation costs are a small fraction of my expenses. It makes sense just to buy a decent workstation outright rather than haggle with the lease people and try to return or buy out the eqipment later on. Other businesses will operate differently.
My $.02
Renting is more expensive than leasing because you can halt the contract with short notice.
Buying means spending more money to start with.
Borrowing money to buy instead of leasing would be the obvious choice IF the lender knows that you will succeed. If there is doubt about whether you will succeed with your new company, it will be very expensive to borrow the money to buy the stuff, and then leasing is cheaper.
That's it.
Lars Dybdahl.
This idea made no sense to me back in the days when I worked for a 'Big Six' accounting firm - you know, when dinosaurs roamed the earth?
However, at the time, this organization was legally a limited liability partnership. As such, any assets were problematic for a couple of reasons.
1. Capital expenditures must be depreciated over a multiple year cycle - you may pay $10K for that box, but you have to treat the box as if it's worth $10K this year, $6K next year, $3K the next, etc. We all know that computers depreciate more rapidly than cars, and there's no way that you could recoup 60% of the purchase price 12 months after purchase of a box. Expenses, however, are written off as they happen. Spend $10K on a lease this year, and you write off $10K THIS year.
2. You also show no value for that asset because it's not yours. This matters when the partners are concerned that a lawsuit loss might cause assets to be liquidated and LLCs like to have as few assets as possible. The less there is, the less that can be taken - or so the thinking goes.
So, it may cost more actual dollars the way you're doing it, but I bet that the accountants and lawyers have it figured out so that it's really in the best interest of your organization to 'waste' that money.
Hope this helps!
Regards,
Anomaly
But Herr Heisenberg, how does the electron know when I'm looking?
My company traditionally purchased their own equipment, but at one point was offered a "killer" deal. We were a major software company which was recently taken over (ahem). The leasing deal looked great on paper (i.e. the Bean Counters LOVED it). In practice, it sucked wind. Not the pleasant kind I find blowing by my window as I type this, but rather more of the offensive sewage variety. It created a maintenance nightmare, added overhead that required more staffing to deal with returns, getting off-lease equipment returned from people in the field, which required new leased equipment, a rebuild, transfer of files, etc. despite the fact that the machines were plenty good enough to handle the current software load for another year. By the time the dust settled, my department vowed never to lease anything so transient as user desktops/laptops. Some large cost items which made sense and didn't require extra staff, tracking, and hidden work requirements were left on-lease. All-in-all, the CPAs can figure out how to get you some bang for the buck either way via depreciation, tax breaks, and what not. Don't be sold on leasing because someone tells you it's a better deal financially. When we ran the numbers after all was said and done, it ended up costing us much more in PeoplePower and requirements to make it all work - and even then it still sucked. Own your own. Accept no substitute.
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The only reason (especialy listed) companies like this is for cashflow and not having it on the books.
In one year you can choose to spend, say, 1M on IT. Or you can spend 250K leasing it every year. That leaves 750K looking good on the books and can be used to invest in other money making opportunities.
It's 5 or seven years that you take depreciation. a couple of years ago i bought some hardware. the tax man (H&R) said that to get the full dep i had to keep the stuff 5 (or seven) years. he said that if it was junk, i should put it in the basement until we were done depreciating it.
5 years is a long time for computer equipment. the only thing that i've had that still has high usefullness after 5 years is an HP laserjet 4000 printer and a viewsonic 20inch monitor. a fair amount is around because it still has *some* usefullness. but there's been an amazing amount of stuff that was junk before 5 years was up.
so, i can see the tax benefit for leasing (computer equipment).
eric
It's not as simple as that - I am a lawyer - and tax is one of my areas of interest. The rule is - that you can expense leased equipment and take a full deduction for the cost of lease payments as long it is a true lease and the payments and final buy out price do not make it look to the IRS like a disguised sale. If it looks like a disguised sale - the IRS will reclassify the lease as a sale and deny the deductions and make you depreciate it over it's listed useful life - without going into opter options like section 179 expensing or double declining balance depreciation...
We changed from buying to leasing hardware (desktops and servers) about three years ago. The primary reason we changed was to move the costs out of our capital equipment budget into the expense budget. We're not a huge business and prefer to reserve our limited capital for plant equipment.
..." yeah, we "sold" it to you for $20, including keyboard, monitor, mouse, and a Windows license.
On the other hand, I wanted to change to leasing anyway. I time-phased the replacement schedule, so we replace 1/3 of our desktops/notebooks every year. For desktops, everyone getting new hardware every three years not only gives us a fair chance at keeping hardware fairly capable of running new software, it also cuts down on user complaints -- "They get new computers; we have to use old stuff!" Everyone knows that there's a three year cycle and when your turn comes up, you get new kit. It does also help with the disposal problem: our society is so saturated with cheap PCs that most charities, schools, and non-profits don't want old stuff. I'm willing to sell (or give, depending,) obsolete stuff to new employees but that hasn't worked terribly well in the past. Too many folks want too much support -- "Can I put a wireless network card in this old computer? What can I do to make it run this game my son bought?" -- that sort of thing. A few employees try to take advantage -- "You sold me this computer and it won't
A downside is that for most leasing companies, you have to keep the original packaging material to ship the stuff back to them three years down the road. Never underestimate how much space all those boxes are going to use up, not to mention the time you'll spend trying to match PCs, monitors, laptops, etc. to their proper box.
For servers, it means we get new servers every three years, which means that I don't have to hugely overspec the thing when I buy it in the hopes it will prove useful more than three years down the road. It also means that it gets complicated if you decide a year later that you need more memory or additional processors. The leases won't end at the same time or you buy it and end up with a box of useless kit when you return the server. It also means that for better or for worse you're going to end up doing server replacements (and all that entails, time-wise,) every three years. We time-phased this, too, so not everything gets replaced at the same time.
We recently decided to go with five year leases on the servers. The rate of cycle-eating inflation with applications hasn't been too severe lately, so we think that even if it won't be top-of-the-line three or four years down the road, we can still find something it can do. For example, if the new one gets too slow running the database, maybe it could host a different application, or a set of aplications known to play well together when hosted on the same box.
On the whole, after three years (one full cycle,) of leasing, I prefer it over buying. I spend a lot less time worrying that I'm buying too little hardware for my needs down the road and we're saving capital for other uses. I don't worry about what to do with older equipment any more and I know that when the manufacturer's warranty runs out, the hardware goes away and is replaced by new stuff with new warranties. As a smaller organization with limited resources, our little group hasn't spent noticable time on hardware issues for the past three years and that's a good thing.
Rb
Typically this only happens when you lease long-term capital items (like a building) that last > 30 years. Computers would rarely fall under this category. GAAP (Generally Accepted Accounting Principles) rules also vary based on your jurisdiction. Plus remember folks, IANAA.
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You're in a business unit of a Fortune 100 company. You have accountants that can answer this question.
Every business is different -- ask a professional what is best for your business. That's what you pay them for...
-ch
People are missing the obvious. Companies lease because they don't want to pay a lot of cash up front. Why drop $1.2m on 1000 computers when they can lease them all for at $40k a month for three years? It's the same reason people finance their cars. And yes, leasing is financing. Don't be fooled by the accounting treatment. When you lease, you make a promise to pay X for Y months, and then give back an asset worth Z. X*Y+Z is the cost of the asset plus some interest. Companies have two main financing alternatives if they want to buy an asset. They can sell stock or issue debt. The problem is, those two actions show up on the balance sheet and weaken the company's financial picture. Leasing doesn't show up on the balance sheet (also called off-balance sheet debt) and they get a tax savings for whatever they buy, and interest rates are usually good (because it's a real asset), so leasing's become the third, and typically the best, alternative for acquiring a capital asset. -- Tristan Yates, author of IT Leader
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The second constraint is that those doing the maintenance have no ties to you, which mean that they don't have to do anything effective. I've been in companies where "guaranteed support" from contracts really didn't exist. The contracts had too many get-out clauses and fine-print, exempting them from any kind of quality of service, even though we were paying through the nose for those extra guarantees.
The third problem is that you're likely to get refurbished equiptment with an unknown history and minimal to no quality control. Even if there were checks, though, reliability is an unknown. From electron migration to thermal damage on chips to hairline cracks in the motherboard - there are many faults that are hard to identify in any simple laboratory test, but which are exceedingly likely for older equiptment.
Security is a big issue, these days. You think a refurbished server or router is going to be running fully-patched, fully-tested environments? Chances are, even those who own the equiptment will have no idea of what is actually running. It is unlikely, but possible, that "logic bombs", root-kits and other hard-to-spot malware may be running on the device when you get it.
Buying a commercial off-the-shelf solution is not perfect and won't PROPERLY fix any of the above, but it's a better bet for anything that is mission-critical.
The "ideal" is to buy the component cards from the manufacturers, assemble & burn-in test in-house, and then deploy. Then, you have 100% control over the steps and actually can provide a higher level of assurance. True, it won't have any fancy warranties, but as downtime is the most expensive part of any IT operation, fancy warranties that companies rarely honor anyway are of little value.
The gratest fallacy in IT is to rely on stickers, labels and other scraps of paper. (a-la the certification issue discussed on Slashdot recently.) These things add nothing and frequently cost lots. What adds value is whether the hardware works and works well.
If you want the job done right, do it yourself. That has been true for hundreds of years, and if modern practices have changed things at all, they have made it all the more important to remember.
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Here's the leasing rule of thumb that an accounting teacher at my college once gave me:
Every product you buy has an estimated replacement lifespan. Computers, for example, get to be about 3 years old before people tend to replace them. The cost of leases are usually calculated using this estimated lifespan.
If you are going to use a product for LESS THAN 75% of it's replacement lifespan (switch computers every 2 years), you are better off leasing. Anything longer than that, and you're probably better off buying.
Please note that the replacement lifespan is quite different than the actual product lifespan (Computers working 8+ years, etc).
~D
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You example of buying components and assembling boxes yourself is exactly what you do _NOT_ want to do in a critical production environment.
Establish long lasting relationships with large systems integrators and builders such as HP, IBM or SUN. Work with your vendors to get a solution that matches your requirements.
Then, hold your vendor to the agreement. If your not getting what you need, call your sales rep. Call the VP of customer relations/support for the company. Talk to the money people rather than the technical people if you are not getting support. It will get fixed, and quick too.
My company currently leases their computer equipment and it's a nightmare. The CFO sayes "it's good because you always have fresh equipment in the environment" which masks what's really going on. The technology is being driven by the lease, rather than corporate need. You can replace purchased equipment every three years also, nothing is preventing you from doing this if you realy want "freshness". By leasing you are forced to upgrade and migrate systems that do not necessarily need upgrading and you need to take time away from other projects to do it.
Also, if you were to lease refurbished equipment, why wouldn't you reformat the system from scratch with the latest software, etc. Heck, why don't you do this with NEW equipment? God only knows how long its been sitting in a box on the shelf?
True, it won't have any fancy warranties, but as downtime is the most expensive part of any IT operation, fancy warranties that companies rarely honor anyway are of little value.
You should be working with reputable vendors, not fly by night whitebox assemblers operating out of Pakistan. All my critical equipment is covered under 4 hour response warranties, and once I've identifie dthe problem I usually have a replacement part on site in 2 hours. The only exception I've had is during a hurricane when the part had to be sent from a remote fulfillment center, then it took 6 hours. Something tells me you're an order the parts and build it yourself guy, useful for making your clients dependant on you I guess, but not much else.
You are in a maze of twisted little posts, all alike.
Funny this question should come up now.. Just 10 minutes ago I finished reading an article in Health Data Managment about hardware maintenance. In the paper version they had a special sidebar about leasing vs buying. In the electronic version, it's at the bottom.
In short, they found that if you want to turn over your computers frequently and on schedule, and were good at asset managment, leasing was generally favorable. But if you decide you want to turn them over ahead of schedule, make changes to the systems during their use (like add memory), or aren't amazing at tracking assets, then the administrative burden could be really heavy.
They also had a neat description of a procurement system that facilitated the vendor bidding process.
Overall, the article is a nice balanced look at the topic.
Pro
:-)
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1. Forced retirement of obsolete equipment at the end of the lease. Leases eliminate management discretion in the upgrade process. You can and will upgrade when the lease expires -- not before, not after. Useful when senior management is out of touch with technical reality, although the loss of discretion cuts both ways (see below).
2. Monthly payments -- better short-term cash flow without actually borrowing money.
3. The "temporary" nature of leased PCs is understandable by the average employee. If they KNOW their machine is going away in 36 months, they tend to find better places (file server, CD, etc.) to store their data. Leased servers have the same impact on sysadmins -- they can plan on a non-discretionary 100% replacement at a known date in the future.
Con
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1. Mid-life hardware upgrades are a problem. Do you save the old parts to put the machine back to as-delivered condition when the lease expires?
2. Who owns the software? Is that leased also? Usually the answer is "no" (see Microsoft EULA). But you have to wonder about the OEM packages that may be pre-installed and supposedly licensed to a specific machine. Of course, open source would take care of the problem
3. It is possible to have a lease that extends beyond the warranty period. How much do you spend to fix a computer you don't own? What happens when you return it and it's broken? If you are paying seperately for hardware maintenence, how happy are you going to be when the maintenance cost exceeds book value?
4. Towards the end of the lease, the monthly payments will exceed the value of having the equipment. What do you do if the equipment is obsolete before the lease expires?
I think the depreciation curve on IT equipment is too steep for leasing to make sense. I have some experience with leased equipment. My company bought a smaller company, and they had leased PCs. Not only were they leased, they were barely adequate when new and were obsolete at the time of the acquisition. Nobody would spend money to upgrade the PCs because the lease was going to expire in about a year. The cost of the upgrades (monitor, OS, memory, disk, etc.) was dangerously close to the cost of replacing the machines outright. The employees had to suffer with junkware for almost a year before the problem could be solved. If the machines were purchased, the problem could have been solved sooner. It's hard to acknowledge technical reality when money is going out the door every month. If the stuff is already paid for, it's a little easier to wake up and smell the cappuccino.
Leases are 99% about tax tricks. The person to talk to is your accountant.
I have done a lot of work installing desktops & servers that were under lease. The hidden pot of gold to the leasing company comes at the end of the lease. Over 90% of businesses are not ready to return the equipment at the end of the lease. They need to arrange upgrades, replacements, new software, whatever. But the leases are financed such that all the costs are covered by the end of the lease, say 36 months. And if the equipment is not returned on the anniversary date, the monthly payments continue until it is returned, or the client buys out the equipment. These payments after 36 months are almost all total profit to the leasing company. HP Financial, Dell Financial and GE Capital all make a killing at this point.
If your business is proactive and arranges to replace the equipment as is comes due you do OK, but most get fleeced for 3 or 4 months, some over a year until they can make a decision and implement it.
True enough. After all, look what happened to his empire. He couldn't even keep his flood control dams online....
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