Computers: To Lease Or Not To Lease
You can buy that hot new Pentium II desktop for $3,000. Or you can lease it for only $110 a month. Sounds like a great way to save money, right? So you do the math, multiplying $110 by the 36 months of the lease, subtracting your tax break, comparing it with buying, and--whoops, leasing doesn't look like such a great deal after all. At best, you will have saved a few dollars or just barely broken even.
So why is the computer world going gaga over leasing, with rentals expected to double during the next five years? In a word, flexibility. Advocates say leasing lets you switch systems more often to keep up with fast-moving technology, while leaving you with more cash to expand your business. It's a strategy with increasing appeal to small businesses, with about 12% already leasing one or more of their computers, says Raymond L. Boggs, an analyst at market-research firm IDC/Link. That's about the same rate as larger companies, says Joseph C. Pucciarelli, research director at Gartner Group, who expects one out of every four personal computers to be leased by 2002.
At best, Boggs says, you should figure on three years before your desktop turns into a doorstop. At that pace, buying becomes a major burden for the typically cash-strapped small business. For instance, getting new computers for a five-person office could mean coming up with $15,000 every 36 months--a major blow to your bank balance or line of credit.
But if you lease, your cash hoard is left intact and available for growth opportunities. In effect, leasing serves as another source of financing.
When it comes time to get rid of the old computer, there's another advantage: You just ship it back to meet its maker. That would be just fine with Adrian Selby, who has four old computers cluttering his consulting office in Cornwall Bridge, Conn., where he creates special effects for corporate presentations. It's a field where technology rarely stands still for long. "My needs are always changing," says Selby. "I consider these things disposable after two years." So last year, he took out a 24-month lease on a state-of-the-art laptop from Dell Computer Corp., and he fully expects to exchange it for a new one in 1999. Tech experts concede that you could come out a few bucks ahead if you buy a computer and resell it yourself. In reality, though, you'll probably waste valuable time on the sale and fail to get top dollar anyway.
SOUP TO NUTS. Which lease is right? They come in a dizzying array from independent leasing companies and retail stores. Some good deals are being offered direct from manufacturers such as Compaq Computer Inc. and Dell, with terms as short as 24 months. Typical plans run three years and give you the option to buy the machine when the lease expires at then-market prices for used equipment.
A more popular variation sets the option-to-buy price at 10% of the original retail value, making it easy to plan your budget. In practice, you might pay $111 a month for a machine worth $2,999, which pegs your purchase option at $299. If, however, you're pretty certain you won't want the old clunker in 2000 when the lease expires, you can skip the option to buy and save $108 in payments over the duration of the contract.
Some vendors, such as IBM Credit, are offering soup-to-nuts packages previously available only to the largest customers. The 36-month lease includes installation, six months of technical support, and the option to upgrade to new technology after two years, in return for a set fee. You can also add high-end services such as system monitoring and maintenance. The point: You can put a lid on all the other costs of owning a computer, which IDC estimates can exceed one-third of the machine's price.
Whichever lease you decide on, the total monthly payments can quickly top a computer's sticker price. But look at your final cost. Thanks to the Internal Revenue Service, you'll get a bigger tax break on leasing, because the fees can be deducted every year. By contrast, you would have to depreciate a computer purchase using a much less generous IRS formula. If you borrow to finance a purchase, that jacks up the final cost even more. The result? "Usually, there won't be a big difference at the end of the day between leasing and buying," says James M. Piazza, a tax partner at Arthur Andersen Enterprise Group.
LOWBALL? All the same, leasing has some real pitfalls. For instance, the seller could increase the sticker price or lowball the future value of the computer, which would raise your payments. And keep an eye on cash flow. Find out the annualized financing cost of the lease and compare it with the rate you could get on a loan. "If you can lease at a rate only slightly higher than what it would cost you to borrow and then to buy--say, 1%--then leasing is a better deal," Piazza says.
For instance, the $111 lease cited above costs the equivalent of 23% annually--not bad if your alternative is the 22% interest charged by CompUSA for its in-house credit card. But it's pretty steep compared with 15% on the best small-business credit cards. And if your business has cash earning 2% in some bank account that isn't going to be used for some other purpose, then leasing doesn't make a great deal of sense. "It isn't the answer all the time," says Ralph Mango, a vice-president at Dell Financial Services.
Thinking about breaking your lease early? Don't. Most contracts force you to pay the remaining installments or exact a large penalty (although some companies may cut you a deal if you're looking to upgrade). Also, make sure you start thinking about how you're going to replace the machine six months before the lease expires, says Gartner Group's Pucciarelli. Otherwise, the deadline will arrive, your whole life will still be on that computer, and you'll have no choice but to sign a lease extension--boosting your total cost far beyond what it would have cost to buy. And under any circumstances, expect to pay the freight when it's time to ship the computer back. At today's rates, that's typically about $80.
What's the best rationale for not leasing? If you don't have to stay on the cutting edge of technology, it's better to buy. Some companies use computers mostly for word processing and don't get material from outside companies created with newer software. In that case, the computer will probably still be useful long after its third birthday.
Brian D. Brumit, a tech specialist at Coopers & Lybrand LLP, points out that you can also use a combination of leasing and buying to minimize costs. This means leasing the hottest machines for the top technical people who constantly need upgrades and buying less advanced machines for office workers doing low-tech jobs like simple typing who "can make do with second-best," says Brumit. Assuming, of course, that the superheated competition generated by technology doesn't raise the bar for "second-best."