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After a long dry spell, businesses are finally beginning to invest in IT equipment. Many are choosing to lease rather than buy.
Karen Bannan, CFO Magazine
July 1, 2004
Ah, America — land of the free and home of the 36-month lease. Truth is, leasing has become something of an obsession with American consumers, many of whom lease Cayennes and Beemers and Lexus SUVs they couldn't otherwise get close to affording. Given the sometimes onerous terms of the contracts, personal-finance gurus point out that leasing is generally a lousy idea.
All of which brings us to a recent report from Forrester Research, which shows that, after a long dry spell, businesses are finally beginning to invest in IT equipment. With the economy on the uptick, and with many companies eager to replace aging hardware, the increased investment in technology is hardly surprising.
What is somewhat surprising: many companies are choosing to lease this new hardware. One study predicts IT leasing will grow at a 6.5 percent annual clip from 2002 to 2005 — a sizable jump from the 1.5 percent yearly increases recorded in recent years. Andrew Bartels, a research analyst at Forrester, says leasing technology equipment has become common practice with CFOs. "Companies aren't ready to tie up cash in equipment whose life may turn out to be only two or three years," he says. "That's where leasing comes in."
It's also where lessors come in. Most major hardware vendors now offer attractive lease programs, including IBM, Hewlett-Packard, and Dell. In May, Dell launched a campaign aimed at small-to-midsize businesses, which features zero percent financing on a 30-month lease for hardware purchases of $500 and up.
Leasing specialists report a big rise in the number of new leases being written, as well. Dan Flagstad, co-CEO of Relational Funding Corp., in Rolling Meadows, Ill., notes that new technology leases at Relational are up 20 to 30 percent this year.
Some Restrictions May Apply
Of course, finance executives have weighed the merits of equipment leasing for decades. And many corporations do lease some equipment, particularly things that are too expensive to purchase (corporate jets, for example). But in the past, companies tended to buy their tech equipment, arguing that (a) IT provided a competitive advantage and (b) computers were cheap.
While those arguments still hold, the business landscape has changed. Low interest rates have reduced the carrying costs of leased equipment. At the same time, the useful life of a business machine has grown shorter; PCs now tend to need replacing every two to three years.
Leasing solves that problem. What's more, renting machines enables companies to replace old equipment without incurring disposal costs or running afoul of the Environmental Protection Agency. In addition, hardware vendors have become more flexible with their leasing arrangements. For instance, some will work with a customer that wants to upgrade equipment or add units before the lease's end. One approach: a vendor will deliver more PCs than a company needs, but will charge leasing fees only if the extra computers are actually put to use.
That's not to say that leasing IT products is without risk. As with consumer car leases, dangers lurk in the fine print. "People need to pay attention to hidden costs such as interim rent and costs associated with the end-of-lease procedures," cautions Cliff White, treasurer of NEW Customer Service Cos., based in Sterling, Va.
White recently leased Dell equipment for his company's Oregon-based contact center. He advises potential lessees to ask vendors to explain all upfront and end-of-lease costs and fees. "You need to understand the cost of returning or shipping your items, and if you'll need to get your equipment certified before you return it," he warns. "And ask your leasing company how it handles partial returns."
Good advice. Something as simple as a missing manual or a stray PC can cost a company big, claims William Zadrozny, CEO of Siemens Financial Services in Iselin, N.J. "There are nuances that you have to be clear on," he says. "Companies can require exact serial-number matches [on returned equipment]." Zadrozny also says companies must return equipment on the exact date a lease ends — or risk paying another month on the hardware.
Still, White insists, "leasing companies have definitely made it easier and are trying to take the burden of administration off the lessee."
Karen Bannan is a Long Island, N.Y.-based freelance writer.