Many financial managers are attracted to IT equipment leasing because it can potentially result in lower-cost procurement, while keeping the cost off the balance sheet. They also may believe that leasing minimizes the risk of technical obsolescence.
Many IT managers are attracted to IT equipment leasing because of the concept that it will enforce equipment-refresh cycles that lower costs and increase productivity. Equipment leasing is also frequently the quickest, simplest way to respond to urgent IT needs.
Those reasons are legitimate. IT leases can be kept off the balance sheet with operating lease structures under current FASB rules. These lease arrangements do have the potential to reduce equipment cost. Well-managed equipment refresh can be beneficially coordinated with lease terms. And an equipment lease is usually easier to enter into than setting up a debt structure, particularly if a master lease is already in place.
But the reality is that these benefits can only be achieved if the lease agreements are properly structured to minimize cost. When IT equipment leasing agreements—including lease schedules—are not structured to cap risk for the lessee, lessees often pay 20-50% more than if they had bought the IT equipment.
So how does a business properly structure an IT equipment lease? These are five steps to follow.
1. Don’t rely on equipment leasing companies as a primary adviser.
Many, if not most, enterprises have limited knowledge about the nuts and bolts of IT equipment leasing. So for advice they rely on the only people they know who do have this experience—representatives of an equipment leasing company. Advice from lessors can be useful but it’s hardly objective, and enterprises without in-house expertise in IT equipment leasing should always supplement it with advice from an objective, third-party source familiar with the risks.
2. Analyze historical leasing performance to determine the cost of risk.
The only way to accurately project future leasing costs is to do a full financial analysis of past leasing performance. This is can be a substantial undertaking, but not only will it help determine the true cost of various terms in an particular IT equipment leasing agreement, it will yield valuable dividends in developing a smart long-term procurement strategy.
3. Identify contract risks and quantify their costs in each lease proposal.
Identify the risks present in each proposal (e.g., uncapped interim rent, onerous notice requirements, provisions that make default likely, unreasonable return conditions, unfavorable end-of-lease terms). Then calculate the cost of each of those risks based on the historical costs determined in step 2. With this cost information, a lessee can accurately determine the all-in cost of a lease proposal and more precisely compare various lease proposals from different lessors.
4. Negotiate for the best price and terms.
With the costs of risk quantified, the lessee has more leverage in negotiations because the full price is on the table.
Armed with a true picture of the costs involved, a lessee can often come out of negotiations with a much better deal, lowering all-in cost of the lease over the lease lifecycle. However, an in-depth knowledge of the typical language of IT equipment leasing agreements is also necessary. It’s also best to have a negotiator who’s experienced in dealing with equipment leasing companies.
5. Measure ongoing lease performance.
To avoid having to continually repeat step 2, track ongoing lease performance, and break it down by category (interim rent, deposits, extension rent, etc.). This will provide essential guidance in future leasing decisions and could also supply some leverage in negotiations over ongoing contracts.
Conclusion
Choosing to lease IT equipment rather than buy it can be an astute strategy—but only if risks and hidden costs are controlled. Appreciating the importance of the five steps above will help anyone involved with IT equipment leasing, but this outline of the steps involved is only a basic introduction to IT equipment leasing.
Considering the cost consequences involved, why not call Lease Portfolio Recovery Services to discuss your situation? You have nothing to lose, and you could save a lot of money. If you need help with IT equipment leasing strategy, or with getting out of a bad IT lease, email or call (866) 348-3322.
