LEARNING OBJECTIVES

CASE #9 EQUIPMENT LEASING

1. To learn more about the equipment leasing. 2. To understand the difference between lease and buy options.

Do you buy your laptop or lease a laptop? That question is one that mobile office professionals and their companies must consider carefully. Ensuring that mobile office professionals have the best equipment is paramount to ensuring their success on the road. Working with out-dated mobile gear and attempting to use workarounds can cost a companytime and money, which defeats the purpose of mobilizing their workforce. It's important formobile office workers to keep up with technology especially as it relates to mobile office technology. Networking and software programs are constantly changing and upgrading. If youpurchase your laptop, odds are: it's already obsolete; it can be difficult and expensive to upgrade.

Leasing on the other hand provides you with a laptop that is current technology and most leasing arrangements have options for trading in for newer and more up-to-date models. Review the pros and cons of leasing and use that information to determine whether you should purchase or lease your laptop.

Monthly payments can be easier on the budget; No fear of obsolescence; Quick replacement in case of problems; Free technical support;

Maintenance agreements are available to provide hassle freerepair/replacement; Allows mobile workers to try different laptops without the commitment of purchase; Use a leasing arrangement to determine which laptop is best for mobile office workers;

Payments may end up more than price of purchase; Maybe locked into long lease periods before upgrading or trading in is allowed;

If international travel is involved may not have option of getting repairs or replacement in atimely fashion;

Inability to return laptops no longer required -stuck paying for a laptop not in use.

What is equipment leasing?

Equipment leasing is a vital tool for all businesses looking to grow and finance equipment. It allows you to agree a fixed term contract with which you can lease brand new equipment without a big outlay in Capital Expenditure (CAPEX), instead paying for your equipment with tax-deductible Operational Expenditure (OPEX). Equipment leasing contracts are typically marked by a securing of the agreement against the equipment alone, and with regular fixed- amount payments which do not affect other credit lines or banking relationships. Repayments are designed to be taken over the useful life of the equipment. Leasing is ideal for equipment which primarily increases revenue or reduces costs, meaning an immediate return on investment (ROI).

Should your business lease or buy equipment? The answer depends on your situation. Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life.

Leasing: The Benefits

Leasing keeps your equipment up-to-date. Computers and other tech equipment eventually become obsolete. With a lease, you pass the financial burden of obsolescence to the equipment leasing company. For example, let's say you have a two-year lease on a copy machine. After that lease expires, you're free to lease whatever equipment is newer, faster and cheaper. (This is also a reason some people prefer to lease their cars.) In fact, 65 percent of respondents to a 2012

Equipment Leasing Association survey said the ability to have the latest equipment was leasing's number-one perceived benefit. You'll have predictable monthly expenses. With a lease, you have a pre-determined monthly line item, which can help you budget more effectively. Thirty-five percent of respondents to the Equipment Leasing Association's survey said this was leasing's second-highest benefit.

You pay nothing up front. Many small businesses struggle with cash flow and must keep their coffers as full as possible. Because leases rarely require a down payment, you can acquire new equipment without tapping much-needed funds. You're able to more easily keep up with your competitors. Leasing can enable your small business to acquire sophisticated technology, such as a voice over internet protocol (VoIP) phone system that might be otherwise unaffordable. The result: You're better able to keep up with your larger competitors without draining your financial resources.

Leasing: The Downsides

You'll pay more in the long run. Ultimately, leasing is almost always more expensive than purchasing. For example, a $4,000 computer would cost a total of $5,760 if leased for three years at $160 per month but only $4,000 (plus sales tax) if purchased outright. You're obligated to keep paying even if you stop using the equipment. Depending on the lease terms, you may have to make payments for the entire lease period, even if you no longer need the equipment, which can happen if your business changes.

Buying: The Benefits

It's easier than leasing. Buying equipment is easy--you decide what you need, then go out and buy it. Taking out a lease, however, involves at least some paperwork, as leasing companies often ask for detailed, updated financial information. They may also ask how and where the leased equipment will be used. Also, lease terms can be complicated to negotiate. And if you don't negotiate properly, you could end up paying more than you should or receiving unfavorable terms. You call the shots regarding maintenance. Equipment leases often require you to maintain equipment according to the leasing company's specifications, and that can get expensive. When you buy the equipment outright, you determine the maintenance schedule yourself.

Your equipment is deductible. Section 179 of the IRS code lets you deduct the full cost of newly purchased assets, such as computer equipment, in the first year. With most leases favored by small businesses--called operating leases--you can only deduct the monthly payment.

Buying: The Downsides

The initial outlay for needed equipment may be too much. Your business may have to tie up lines of credit or cough up a hefty sum to acquire the equipment it needs. Those lines of credit and funds could be used elsewhere for marketing, advertising or other functions that can help grow your business. Eventually, you're stuck with outdated equipment. As I mentioned earlier, computer technology becomes outdated quickly. A growing small business may need to refresh its technology in some areas every 18 months. That means you're eventually stuck with outdated equipment that you must donate, sell or recycle.

Asking the Right Questions

If you're thinking about leasing equipment, you'll need to do your homework to ensure you get the most favorable terms. Here are a few questions that'll help you get started: What type of lease are you being asked to sign--a capital lease or an operating lease? A capital lease is similar to a loan. With this type of lease, the equipment is considered an asset on your balance sheet, and you get the benefits--such as tax depreciation--and risks--including obsolescence--of ownership. Capital leases are often for as long as five years. With an operating lease, the leasing company retains ownership, and for tax purposes, the equipment is considered a monthly operating expense rather than a depreciable asset. Operating leases are generally more popular among small businesses because they don't tie up funds and are usually short-term--three years or less.

Is there a buyout option? You may have a choice between a fair-market value (FMV) option and a $1 buyout option. FMV means you can buy the equipment at the lease's end for its fair-market value, which could be hundreds of dollars. In contrast, a $1 buyout option means the equipment is yours for $1 when the lease expires. And while that sounds like the best option, keep in mind that monthly payments on FMV leases are usually lower than $1 buyout leases. If you're fairly certain you'll want to upgrade to new technology when your lease expires, go with the FMV option.

How long is the lease for? Usually, leases for computer equipment run 24, 36 or 48 months. The longer your lease, the lower your monthly payments--but you're also likely to pay more over time with a longer lease. Does the equipment have to be insured? Some leasing companies require you to insure the leased equipment. If you don't, fees may be added to your monthly payment to cover insurance. Can I add to the lease? Most leasing companies don't mind if you add equipment to an existing lease. Your lease payment will be recalculated accordingly; lease terms don't usually change.

Can I terminate the lease early? What if you no longer need the equipment you're leasing or you want to upgrade to newer technology sooner than you expected? Find out in advance if you can pay off your lease early, and if there's a prepayment penalty (and if so, how much?). Ultimately, a few simple rules of thumb may help you decide to lease or buy. If your equipment requirements are relatively small and you have the money--or can get a low-interest loan--then just buy it. You'll save money in the long run. However, if you require a substantial amount of equipment, such as computers for your new company's 10 employees, leasing may be a better option. After all, why tie up a large amount of cash--especially when you could use that money to establish or grow your business?

Exercises

1. One of the lease pros is:

a. you have to pay for tech support. b. high monthly payments. c. quick replacement in case of problems. 2. Leasing is ideal for equipment because: a. this leads to immediate return on investment. b. this helps you earn money faster. c. this gives you opportunity to invest more. 3. Leasing equipment can be a good option for business owners who:a. have already established their business. b. have limited capital. c. have the equipment and not interested in having an upgraded one.4. To get the equipment in lease you have to: a. pay the full price. b. pay half the price upfront. c. pay nothing upfront. 5. The capital lease is a type of lease where: a. the equipment is considered as an asset on your balance sheet.

b. where you do not get the benefits such as taxes, risks and else. c. where you have to purchase the equipment for a full price to use it further.6. Operating lease is: a. a short-term operation (3 or less years). b. a long-term operation (3 and more). c. an operation which can be done within a few days.

6. Should your business lease or buy equipment? explain why

7. Describe in your own words the advantages of leasing the equipment versus buying it? explain why