Business Leasing Equipment

Business leasing is particularly beneficial for cash strapped small firms. It can be ideal for business owners with limited start-up capital, who need to invest in large computer infrastructures. Most computer infrastructures require technical upgrades every few years.

Having the latest IT in the workplace is necessary to maintain employee productivity. Unfortunately, computer hardware and software must be upgraded and refreshed every few years, as it becomes obsolete or malfunctions. Amazing improvements in information technology, mean the latest software requires ever more powerful processors to be able to support applications.

To make matters worse, the residual value of desktop computers roughly halves each year of its life. This is happening in tough economic times, when many firms are cutting back and being less frivolous with their IT budgets. Unfortunately, high street bank lending criteria has never been more severe for firms that need to borrow to finance computer purchases. Many owners are asking themselves; is it better to buy or lease and where can I get a business leasing contract to suit my requirements?...

Most companies need to buy 'capitals assets' (typically buildings, machinery and computers of high value) in order to function. Capital assets are those which have a productive life of more than one year, and so must be written-off or 'depreciated'. Therefore, if you wish to buy computers for your office outright and take full ownership, the upfront costs of investment can be a huge chuck out of cash flow. The amount of allowable depreciation that can be offset against Corporation tax varies, according to the tax rules in that year. Normally the % is proportionate to the average economic life expectancy of that asset. Unfortunately, computers usually depreciate in real terms faster than official allowable rates of depreciation. This means the end of their economic lives, they have no residual value. The alternative is to rent those business assets instead...

Which type of lease you choose, will probably depend upon the value of the equipment, the likelihood you will need a technology refresh in the future and the rate of depreciation of the asset. There are two main types of leasing, which are commonly applied in the IT industry; finance leasing and operating leasing:-

• Finance Lease - with a full pay out finance lease, the total amount of lease payments, will equal the value of the computer equipment over the lease term (as if it were purchased outright). At the end of the term, the lessor may sell the IT equipment onwards, in order to retrieve any residual value from the secondary broker market. Alternatively, you may wish to extend the lease term for additional periods, (at a nominal cost) because you still need to use the equipment. This is commonly known as a peppercorn rental. If you are happy for the lessor to remove the equipment, you may obtain a portion of the profits from its potential resale, (if this is written into your original leasing contract).

• Operating Lease - with an operating lease, the rental time frame usually has a shorter the working life for computer equipment. As in a finance lease, the lessor will expect to take back the equipment and re-lease, it or dispose of it in the secondary market. This will mean that your monthly or quarterly lease payments, are likely to be less than a finance lease (which is weighted based on maximum lifetime value of an asset).

The financial benefits of adopting a leasing strategy, orientate around better cash flow management. Leasing avoids the upfront costs of acquisition, allowing working capital to be freed up for operational expenses and investments. These payments are usually fixed, and therefore any fluctuations in interest rates will have little effect on forecasting cash outflows, (unlike the standard variable interest rate business loan). Operating lease payments will also be classed as allowable expenses in the profit and loss account, and not a debt/liability in the balance sheet. This in turn reduces the corporation tax liability, thus increasing net profit. Using leasing also preserves cash during technology refreshes, (which can be somewhat unpredictable in the fast moving technology sector).

You must bear in mind that the leasing companies finance charges, are being included as part of the ongoing monthly or quarterly rental payments. Over the period, this will probably mean that the overall cost will be higher than an outright purchase. You will need to make a decision on the value of holding on to working capital in the short term, versus a bigger three-year IT budget. Most owners of small firms may also have to sign an underwriting agreement with a personal guarantee, (normally linked to personal assets such as their home, car or other business interests). Lastly it can be difficult to predict what percentage of computing equipment needs to be replaced or upgraded over the period, (as the nature of the applications residing on those systems also changes rapidly).

When you lease information technology you will be presented with a number of options, from either an IT vendor, computer manufacturer or equipment leasing company. Always seek professional independent financial advice from a qualified IFA, before making any investment or4 financial decisions. The main areas of study with them are likely to include:-

• Purchasing Leased Equipment - the lessor will own the equipment during the lease term period. This computer infrastructure may include printers, servers, desktop computers and laptops, business software and networking hubs and routers. However, you may need to hang on to it after the lease term expires. Some types of leases provide you with the ability to purchase the computer equipment at the end of the lease term (during the secondary period). This is sometimes known as a balloon payment. Whether you want this option written into your leasing contract, may depend upon how long it will be before you will have to refresh your existing information technology.

• Maintenance and Support Contracts - almost as important as the computer hardware itself, is your ability to get it fixed when it goes wrong. You will inevitably need maintenance services, (such as telephone help desk advice, on-site engineer effects and installation and upgrade services). If you are tied into an agreement with the manufacturer, most will provide additional options to tie in the services, as part of your quarterly rental. If you are arranging leasing finance from a third party, you may need to think carefully about how support contracts can apply in practice.

• Developing Bespoke Applications - often business software is far more strategically valuable than the server it resides on. Some software vendors offer leasing options, along similar lines to computer hardware manufacturers. Think carefully about any restrictions surrounding the licensing rights during the lease term. In particular, your leasing agreement may restrict you from accessing the source code, to develop a bespoke in-house application.

Good luck with your investigation into the pros and cons of IT computer leasing!