Small and midsized businesses struggling to balance their checkbooks and keep pace with advancing technology are failing to take advantage of a strategy that can help accomplish both these goals -- computer equipment leasing.
According to a survey by research firm Gartner Inc. , SMBs generally buy rather than lease their computer equipment. The survey found that 12% of SMBs lease about half of their company desktops and just 3% of companies lease all their PCs. These figures have held steady the past two years. Gartner defines SMBs as companies with between 20 and 1,000 employees and annual revenue of up to $500 million.
"It's just surprising that more companies, more SMBs, don't lease," said Frances O'Brien, a vice president of research at Gartner. Larger companies tend to lease more often, O'Brien said. She recently studied the issue in her report "The Pros and Cons of Leasing for Small and Midsize Businesses."
Leasing computer equipment allows SMBs to avoid upfront costs by shifting payments into regular, set installments; can make it easier to swap out obsolete equipment; and eliminate equipment disposal costs. It also may cost less overall to lease equipment, when compared to the maintenance costs of older purchased equipment.
Major vendors have tried to court SMBs by offering financing options that bundle together hardware, software and services under a single payment.
Disadvantages to buyers can include reduced flexibility caused by set lease schedules and lessor lock-in created by the contract requirements. Also, leasing may cost more than purchasing, especially if the leased equipment does not provide significant efficiencies compared to the old equipment or if the leased assets are managed poorly.
O'Brien offered three tips for SMBs to consider when deciding whether or not to lease computer equipment.
- Understand the reasons for leasing. The IT department may support leasing as a way to get regular technology updates, get outdated technology out the door or simply manage the lifecycle of its IT assets. The finance and accounting departments may see leasing as a way to manage cash flows or solve budget problems. The purchasing group may look at leasing as a way to reduce costs. Be clear on the reasons behind the decision to lease and tailor the contract to meet those needs.
- Consider the expected lifetime of the equipment. Having a 36-month lease makes little sense if you believe the equipment will be obsolete by then or if you anticipate wanting to continue using the equipment past that date. For longer time periods, purchasing the equipment may make more sense than leasing it.
- Identify the group that will manage the lease. Lease agreements succeed or fail in large part based on the quality of their asset management, O'Brien said. Choosing a group to keep an eye on the physical status of the leased items and the financial and contractual obligations of the assets is an important part of a successful lease. Simple details like warranty expirations, maintenance schedules and procuring replacement equipment for after the lease expires must be tracked.
SMBs should also look over the lease contract carefully before signing.
For example, some contracts may require the company to return the leased equipment in its original packing material. "That's still in some lease contracts we see," O'Brien said. "It's just nuts. If you're leasing 1,000, or even 50 PCs, who keeps the packing material?"
Or, a lease may allow the company to return the equipment at no cost at the end of the lease, or buy out the equipment if the company wants to keep it. How that buyout price is calculated should be included in the contract.
"It's not necessarily the legalese, it's the actual obligations contained in that contract regarding equipment usage and maintenance," that might trip up a company, O'Brien said. "A lot of this is plain old common sense, but if they don't have someone really watching the transaction they could run into trouble."