Computer Equipment Leasing – Everything You Need to Know Before Signing a Contract
Business owners, IT managers and CIOs constantly struggle with the decision of whether it is best to buy or lease computer equipment. There’s no clear-cut answer because the decision is different for every business, but the smartest thing to do from a bottom-line perspective is to research both options to understand the pros and cons before choosing.
Benefits of Computer Equipment Leasing
- Modern equipment – Computers and tech equipment become outdated or obsolete in just a few years. When the lease expires in two to four years, you can upgrade to the latest and greatest technology. When you buy equipment, you’re generally stuck with it for the long term due to the large financial investment.
- No down payment – Leasing typically requires no money down, so you can save your cash for other operating expenses.
- Predictable monthly cost – With a lease, you’ll have a predictable monthly cost for the equipment, making it easier to budget over the long term.
- Keeping up with competitors – Leasing allows you to acquire modern and sophisticated equipment that might otherwise be out of your price range. This allows you to keep up with larger competitors by having the latest computer equipment.
- Tax savings – The IRS considers equipment leases a tax-deductible expense. Businesses can deduct the lease payments from their income, which lowers the overall tax burden and reduces the cost of the lease.
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Drawbacks of Computer Equipment Leasing
- Higher long-term costs – Leasing is always more expensive than buying in the long-term, despite the initial cost savings. A computer that costs $2,000 outright might run you $2,400 over the course of a three-year lease.
- Lack of ownership – Some companies prefer to own their own equipment because it gives them control over things like maintenance and upkeep. Rather than waiting for the leasing company to respond when there’s a problem or issue with the computer equipment, you’re in charge of the maintenance.
- Commitment – With a lease, you have to keep the equipment until the contract term expires, whether or not you still need it. When you buy equipment, there’s always the option to sell when equipment is no longer needed.
Questions to Ask Before Signing a Lease
- Is there a buyout option? When the lease expires, do you have the option to purchase the equipment outright? If so, there are usually two ways of doing this – paying fair market value (FMV) or $1 buyout. The monthly payments for FMV leases are generally much lower, but the cost of buying the equipment will be much higher than $1. If you’re planning to trade in the equipment when the lease expires, go with FMV.
- How long is the lease term? Typically, they are 24, 36 or 48 months. Keep in mind that the shorter the lease term the more expensive monthly payments will be.
- Can the lease be terminated early? If you decide before the lease is up that you no longer want the equipment, is there a way to upgrade or return it early? Are there penalty fees for that? Also, are there penalties for paying off the lease early?
- Are you signing a capital lease or an operating lease? A capital lease is more like a loan, and you get the benefits of ownership like tax savings. With an operating lease, the leasing company is the equipment owner for tax purposes. Capital leases tend to last longer – perhaps five years instead of three or less with operating leases.
- Do you have to insure the equipment? Some companies require this.