Cyber-network technology

Should Firms Buy or Lease Technology?

May 20, 2019
From lifecycle to taxes, it is important to weigh the pros and cons of how you acquire the equipment that will drive your company.

All businesses understand the importance of technology when it comes to offering customer service, looking for potential customers, and conducting market research. Regardless of their shape and size, technology is a huge investment decision for all enterprises. And it’s a decision complicated by changing trends and the continuous introduction of new, innovative software and equipment.

Whether an organization is investing in new software, laptops, or POS terminals, the demand is always high for the latest version or model. Most firms thrive on modern technology as it is a huge morale and revenue booster, giving them an edge over the competition.

However, buying new technology may not always be feasible or even necessary for all firms. Read on to understand why leasing is a gainful option for firms looking to invest in technology, and when buying technology is a sensible decision.

Leasing revolution: Leasing can create a lower barrier of entry for expensive equipment that could provide additional revenue. For example, a small doctor’s office might be able to offer MRIs or CAT scans (Credit: Wikimedia.org).     

When Should a Firm Buy Technology?

Buying technology or new IT equipment may be a good option if a firm is using it as a key differentiator. Enterprises with technology at the core of their business can consider buying new technology from time to time. This is because, for these firms, technology is a business asset, driving their growth and giving them an edge over their competitors. For such companies, it makes sense to invest a large capital in the latest technology and equipment.

However, several other factors need to be considered before making a buying decision. Read on to understand the benefits of leasing technology.

Why Leasing Technology Makes Sense?

Did you know more than 80% of businesses in the U.S. lease technology and equipment for their operations? For many, businesses leasing technology is a cost-effective decision as it preserves the cash flow and strengthens the firm’s financial position. It allows the organization to use its working capital for profitable initiatives and unexpected liabilities instead of being tied up with high-value business assets that may depreciate over time. Thus, leasing technology streamlines the process of budgeting and forecasting expenses, enabling the firm to meet its business goals.

Be it manufacturing, construction, healthcare, retail, IT, or finance, leasing allows firms in these and other domains to stay updated with the latest technology. For instance, it’s no secret that the U.S. public healthcare sector is experiencing a revolutionary change, with healthcare facilities, doctors, and dental clinics procuring innovative medical equipment despite budget restraints. Further, since the leasing company takes the burden of obsolete technology and equipment, these healthcare establishments can easily switch to the upgraded ones when the lease term expires.

Lastly, owing to the huge demand for technology across domains, leasing firms are willing to work on mutually-agreeable terms, offering flexible leasing options to strengthen their clientele. The availability of cloud-based solutions like lease management software has made it easy for leasing firms to expedite the complex and time-consuming leasing process, thereby offering faster service to their customers. All these factors have made leasing a profitable option for many firms.

There are multiple tax considerations to consider. Even with an understanding in engineering economics, tax laws are constantly changing. Talking to a professional accountant about your buying and leasing options will provide a better picture to the benefits of each option.

Therefore, firms having aggressive growth goals and looking to cut costs, leasing offers an opportunity to lay hands on the latest technology that’s otherwise too expensive and loss-making to purchase.

All businesses looking to buy or lease technology should determine their long-term strategy and business goals and scrutinize their cash flow before making an investment decision. Firms should consider the following questions when speculating whether to buy or lease technology.

What’s the lifecycle of the technology? In this disruptive environment, technology often goes through a short lifecycle, forcing firms to consider speedy replacement cycles which can be easily facilitated through leasing.

Leasing allows firms to avail of a fixed monthly payment benefit while delivering the latest technology as a replacement. In other words, leasing helps firms access the upgraded technology at a predictable monthly cost, making it a more cost-effective option than purchasing it up front.

When signing the lease agreement, firms should make sure that the lease term doesn’t exceed beyond the need for the technology. If the technology is purchased and becomes obsolete, it can be easily sold. However, when leasing, the firm may have to make the monthly payments and store the obsolete software or equipment until the term ends, making it an unprofitable business decision.

Therefore, it is wise to check the lifecycle of the technology and work on a lease agreement that can be easily modified during the lease term. A lease usually has flexible terms, making it easy for the firm to upgrade the equipment and mitigate the risk of obsolescence.

Does the technology need customization? Customization is quite easy when a firm is purchasing technology or equipment. Though customization isn’t common in the leasing domain, several leasing firms have started offering this option to their clients. Firms should check the lease agreement to determine whether or not the leasing firm can modify or add new equipment or technology to the existing contract.

Decision-makers at companies are increasingly going to have to become experts at understanding the fine print in contracts, given all the services being offered.

Can the firm’s cash flow support the buying or leasing decision? Most firms find it economical to lease technology, as it allows them to procure assets with minimum initial expense. Further, lease firms offer payments are fixed which can eliminate financial surprises. These payment options allow accurate budgeting and improve the key business performance ratios. For instance, if the leased software is infected by a bug, it will be repaired or replaced by the leasing firm as most repairs are covered under the agreement.

Since buying technology or IT equipment involves making a large down payment, it may significantly affect the firm’s cash flow. Firms should consider this factor when buying or leasing technology for their business.

Have the tax consequences been considered? Lease payments are often treated as business expenses in a firm’s tax return statement, thereby reducing the overall lease cost. Purchasing IT equipment and technology also offers certain tax and depreciation benefits that firms should be aware of. Therefore, it is wise to consult a tax accountant before making a lease-or-buy decision.

Organizations looking to invest in technology should consider various factors when gauging a lease-vs.-buy decision. Leasing technology can be a cost-effective option for enterprises with limited capital or who need to upgrade their technology or equipment on a regular basis. On the other hand, buying technology makes sense for established firms who have technology at the core of their business. The information shared in this post aims at guiding firms to make a profitable business decision when investing in technology.

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