Leasing helps storage professionals manage costs

Posted on April 01, 2003

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Karen Larson
Key Equipment Finance
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Tight storage budgets call for a re-examination of "lease" versus "buy" options.
By Karen Larson

In recent years, maximizing budget dollars has become an increasingly important IT consideration. Now more than ever before, storage professionals are weighing purchasing options, which raises the all-too-critical question: Should organizations lease or buy storage equipment?

According to the Equipment Leasing Association (ELA), eight out of 10 businesses lease some form of equipment. Few companies, however, fully recognize the benefits of leasing storage equipment (e.g., better coverage, improved data protection, greater scalability, and easier management).

The latest trend in storage leasing is utility storage, or "pay as you grow." This type of lease allows companies to stay within their budgets by buying only necessary equipment upfront. As storage prices decrease, additional capacity can be purchased without increasing the monthly payment.

Other benefits of leasing include reducing the complexity of a storage acquisition because the monthly payment reflects total cost of ownership (TCO). With the predictability of payment, you can conceivably grow from 2TB to 2.8TB over an 18-month period without a change in the monthly lease payment.

Businesses rely on storage equipment every day, but the value of equipment comes from using it, not owning it. By leasing storage products, companies can transfer the uncertainties and risks of owning the actual equipment to the leasing company and, instead, focus on using the storage equipment as a productive part of their businesses. Leasing can also protect companies from technological obsolescence, a key concern for IT departments.

There are a variety of leasing options; however, the most common are the "capital lease" and the "operating lease."

A capital lease, also known as a finance lease, offers the widest flexibility of term length, which can help keep payments low. Capital leases also provide a variety of tax benefits for the acquired equipment. At the end of a capital lease, companies have several choices, including purchasing the equipment at the current fair market value (FMV), renewing the lease at a fixed price, or a $1 purchase option.

The terms of an operating lease (or an "off-balance sheet lease"), on the other hand, are typically shorter than those of capital leases, and the equipment acts more like a rental. This means the asset (which is the equipment) does not appear on the company balance sheet. When the term expires, companies may return the equipment or purchase it at FMV.

There are also leases available that can be tailored to fit month-to-month or year-to-year cash flow needs. Custom arrangements can also be designed to address budgetary requirements, transaction structure, cyclical fluctuations, etc. Still other types of leases allow businesses to seasonally skip one or more payments without penalty.

To aid companies in the search for a leasing company, the ELA has developed a tool called the Lease Assistant, which is available at www.LeaseAssistant.org.

Karen Larson is president and chief operating officer of Key Equipment Finance's global vendor services unit. She can be reached at (720) 304-1000.


Leasing benefits

Some of the potential advantages "leasing" storage equipment has over other financing methods include:

  • Tax benefits—The IRS does not consider an operating lease to be a purchase, but rather a tax-deductible overhead expense.
  • 100% financing—Since a lease often does not require a down payment, it is equivalent to 100% financing.
  • Immediate write-off—With leasing, payments are treated as expenses on a company income statement, so equipment does not have to be depreciated over five to seven years.
  • Flexibility—As businesses grow and needs change, equipment can be upgraded or added at any point during the lease term.
  • Asset management—A lease provides the use of equipment for specific periods of time at fixed payments. The leasing company assumes and manages the risk of equipment ownership. At the end of the lease, the leasing company is responsible for the disposition of assets.
  • Upgraded technology—Equipment that may depreciate quickly can be leased to limit an organization's risk of being left with obsolete equipment. Plus, leases make it easier to upgrade down the road.
  • Speed—Leasing can allow you to respond quickly to new opportunities with minimal documentation and red tape. Many leasing companies approve applications within one or two days.
  • Improved cash forecasting—When businesses lease, they can accurately forecast the cash requirements for equipment since they know the amount and number of lease payments required.
  • Flexible end-of-term options—Put simply, there are three options at the end of a term: return, renew, or purchase.

Ten questions to ask before signing on the dotted line

The Equipment Leasing Association (ELA) recommends that all organizations ask the following 10 questions before signing a lease:

Before

1. How am I planning to use this equipment?

2. Does the leasing representative understand my business and how this transaction helps me to do business?

During

3. What is the total lease payment, and are there any other costs that I could incur before the lease ends?

4. What happens if I want to change this lease or end the lease early?

5. How am I responsible if the equipment is damaged or destroyed?

6. What are my obligations for the equipment (e.g., insurance, taxes, and maintenance) during the lease?

7. Can I upgrade the equipment or add equipment under this lease?

After

8. What are my options at the end of the lease?

9. What are the procedures I must follow if I choose to return the equipment?

10. Are there any extra costs at the end of the lease?


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