Find Out Why Leasing Can Be So Much More Cost-Effective Than Buying
There are plenty of good reasons why leasing IT makes great business sense for virtually any organization. Below are some of the most frequently asked questions we get from clients who want to better understand the very significant advantages of leasing:
"We have the cash. And cash is free. So why lease?"
The prospect of avoiding interest and financing charges by paying cash is pretty attractive to some companies. But cash isn't free. It's a limited asset, and there may be better ways to use it than tying it up in a depreciating asset like IT.Keeping cash on hand makes it easier to seize a business opportunity before a competitor can arrange financing, or to weather a downturn that cripples your competition. By spending cash on IT, a company can also lose the tax advantages and residual value benefits that leasing provides. (The residual value is the amount that the lessor can expect to recover by selling the asset after the lease ends.) Ultimately, using cash to invest in their business provides returns that are far higher than the interest rate of a lease.
"We keep our assets for at least four years, so isn't owning cheaper than leasing?"
A company may do a net present-value comparison between lease and purchase, and conclude than owning is cheaper. But as we showed above, the cost of cash is usually higher than the debt rate. Cash is a scarce asset on the balance sheet, and a reasonable position is to use the Weighted Average Cost of Capital as the discount factor. Even if a company believes today that the equipment will be kept for a long time, a lot of things can change. A 36-month fair market value (FMV) lease preserves substantial future flexibility at little or no additional cost."Why don't we just finance it with short-term credit?"
Short-term credit is an important resource to financial managers. But even when rates are comparatively low – and particularly in a challenging economic environment when short-term credit is often hard to come by – it makes more sense to use an external, cost-effective source of financing for IT investments, and to preserve short-term credit for other core investments.A fixed-rate lease ensures a regular, low monthly payment that's easy to budget for. It reduces the total cost of ownership, since the lease payment reflects the residual value. It also eliminates end-of-lease disposal issues. And a hardware lease helps your customer meet changing capacity requirements by letting them add or upgrade systems at any time during the lease term. Short-term credit offers none of these advantages.
"What if we have a good line of credit at our bank?"
A line of credit typically has to be secured by $5 to $10 of high-quality assets for every $1 borrowed, which makes it a limited resource that should be kept in reserve for items that cannot be financed any other way.Lines of credit are also usually short-term funded, so there is a substantial risk of interest rates going up over time. But leasing rates (like those from Forsythe) are fixed over the entire leasing period, which makes forecasting and budgeting much easier. Finally, lines of credit often require a company to pay additional fees or incur additional costs, such as reporting inventory or AR levels.
"Why not just get a term loan?"
If a company is considering a term loan, they should carefully consider all of the terms and conditions that may come with it. There are usually fees involved, and the company may be asked to make a down payment or to keep compensating balances. These are all additional expenses that a lease will not incur.When compared to obtaining financing through a bank or other financial organization, remember the added value that Forsythe brings as the world's leading provider of IT financing. We're experts not only in financing, but in technology as well. Leasing with Forsythe will help companies keep up with technology by letting them replace or upgrade equipment either mid-term or at end of lease. We can take an aggressive residual-value position on equipment from IBM and many other vendors, and provide the customer with fair market value on mid-term exchanges.
And as a total IT financing solution provider, Forsythe can structure a lease that rolls hardware, software and services into a single contract with a single periodic invoice, simplifying budgeting.
"Why not just cascade it down to other users or sell it ourselves?"
When planning a new IT acquisition, it's natural that the last thing on a person's mind is how he/she is going to dispose of the equipment a few years down the road. But it's a hidden cost that needs to be considered when choosing between purchasing and leasing.Will the company end up putting retired systems into storage indefinitely? Or trying to sell them for pennies on the dollar (or even less)? Or dealing with the cost and environmental regulations involved with dumping them?
When companies lease their IT equipment with Forsythe, all those issues are eliminated. At the end of the lease, the customer can simply return the equipment to us, and we'll take care of all aspects of equipment disposal, relieving them of any additional cost or legal liability. Then they're free to move on to the latest technologies on the market.
Of course, if the customer decides that they are still happy with the equipment, they have the option of extending the lease on a monthly basis for the same low payment, or negotiating a new contract. The choice is entirely theirs.
