**** THIS IS NOT LEGAL ADVICE ****
**** THE FOLLOWING REFLECTS MY OPINIONS ****
I am currently researching for an in depth analysis of the leasing process from the end users' prospective - and it isn't pretty.
Because the subject is so vast and complicated, I have decided to post portions of the final white paper.
First off, I am familiar with leasing and all the "gotcha's" that contracts carry. I have seen, all sorts of leasing agreements in business technology and the Uniform Industry and I have been very fortunate to work with some of the most honest and open agreements in each industry.
For you I.T. folks, or anyone else who may not be familiar with leasing - here is a "Primer".
Leases are used to defer payments over time. If a company wants to avoid a significant capital outlay a lease is a great option. In addition, because the technology changes quickly, copier leases often include provisions to trade up to a newer model, allowing you to upgrade without buying anew.
You are paying extra for the ability to "pay over time".
For instance, if the purchase price of a machine is $20,000 and you would like to pay a monthly payment for 60 months, the monthly payment is NOT $20,000/60 or $333.33. The monthly would be closer to $586.00/month. If you multiply this out by 60, your total "cost" for the unit, over time, is $35,160.00 - this to say that you would be paying $15,160.00 for the service of paying a known monthly figure for a determined period of time.
The Vendor or Supplier does not usually make more profit on a lease vs. purchase. Although some vendors or dealers add “points” to the lease rate. This increases your monthly and adds to their profit margin.
After a client signs a lease and after the equipment is delivered and accepted, the leasing company cuts a check directly to the Vendor for the purchase amount of the equipment. You, the Customer now have a direct relationship with the leasing company for the equipment. You are establishing a "revenue stream" for the leasing company based on the equipment payment portion of the lease; when service is bundled into the payment, you are also working directly with your service provider, usually the copier dealer.
In a nut shell - When you sign a lease, you are forging a commitment to pay at least the dollar amount on the lease for the number of months stated. There is no other way to envision this agreement - there are no easy or painless methods of terminating a lease early once you "sign on the line which is dotted" - no matter what the circumstances. No matter what the "trusted" copier sales person tells you, you can not get out of the agreement easily and without paying for the privilege.
-- More to follow ---
Your math for an equipment lease seems a little high.
ReplyDeleteMost of the leasing rates I have seen (now, bear in mind, I have been out of the equipment side for about 6 months) is between .0192 and .0212 for a 60 month FMV lease.
That would put the monthly payment for $20,000 between $384 and $424 and not at the $586 per month you indicate. $586 would be more like a 36 month contract.
Almost all vendors I have seen do add points to a contract and many are starting to do in-house leasing which does make leasing more popular and profitable for the vendor.
What most people don't get is that the ability "to upgrade without buying anew" comes at a great cost. The salesman will simply hide the buyout of the old equipment into the purchase of new equipment.
I have been in the industry too long to ever suggest to a company that leasing makes sense unless they plan on keeping the equipment till the end of the lease and can't come up with the cash up front.
Corey, you are correct - my math was high, a great deal high. I have made the corrections - thank you so much!
ReplyDeleteAnd yes, "upgrade" just means "roll-over".
You mention two very good reasons to lease - I do recommend that clients lease, if it makes sense. Indeed, a good amount of thought and awareness are needed to insure it "makes sense".
Thank you very much for you comment.
There are other compelling drivers for a lease.
ReplyDeleteFor an operating lease, the customer can gain the use of the asset without having the asset and the associated debt used to acquire it on their balance sheet. This is the major reason that a company with access to low cost debt will instead select a lease with a higher cost of funds... they are in effect 'renting' the balance sheet of the leasing company!
Second, leasing allows the company to match cash outlay on a period by period basis with the benefit the business receives. Purchasing with cash and expensing the equipment puts the cash and expense burden in the first period, while the benefit extends out for years. Purchasing with cash and depreciating the equipment spreads the expense burden but puts the cash burden in the first period. Financing the equipment and expensing it spreads the cash burden and the expense over the life of the equipment, but adds debt to the balance sheet.
An operating lease can spread the cash outlay and the expense of the equipment over its useful life without adding balance sheet debt. The added debt could trigger bank covenants or could cause the firm to appear more levered, raising its cost of borrowing.
Sam, thanks for your comment.
ReplyDeleteYou make great points - and you do not mention any of the "captive" issues usually embedded within the lease.
To me, a lease, however structured should be intended as you mention - to give the lessor certain accounting and business advantages.
A lease should not be a means to guarantee an endless revenue stream through trickery and deception.
How do you feel if new equipment is treated as a service agreement, as operating rental, if you will? It can be cancelled within 30 days no questions asked. This way it is being depreciated the same way as a purchase, but it is not being treated as a capital expenditure.
ReplyDeleteAnon -
ReplyDeleteI have heard of what you speak of...a 30 day, "no questions" asked arrangement.
And it sounds like you are thinking of bundling service into the "rental" as well.
Interesting, IKON had/has this arrangement right now.
It looks good for the client, but ultimately puts them on the hook for an equipment and service amount.
I am not sure how eager a financing company will be to take back equipment after only 30 days in the field.
So, are you advocating the reseller self-finance?
Or does the reseller stock a "stable" of rent-able/returnable fleet of units?
Thanks for reading, keep coming back!
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ReplyDeleteI haven't heard of Ikon doing this program recently. I am curious about that.
How is the client on the hook for service and equipment?
The equipment is basically "self-financed" by the vendor, but there is no leasing involved. The vendor supplies the equipment and the service. Of course, no one wants to make an investment like this and the client pulls the plug after 30 days, but that is the risk.
High risk/high reward
This program is build as a true services agreement. No leasing, the equipment, service, and personnel (if needed) are supplied in a cancelable services contract.
Anon- ok, as I suspected - self funded.
ReplyDeleteSo no, IKON doesn't have that side of it, but they do have the bundled service/equipment payment, still a "lease".
Your idea is fine, and I have seen it in execution over the years, sporadically.
If the dealer can afford to self-fund a fleet of machines in this capacity, sure, fine.
And I assume that if/when a client executes the cancel clause, the equipment is returned back into dealer stock. And this inventory will most likely be financed by somebody - dealer, manufacturer.
I agree with you that the risk is great.
But what about at the end of life for the machine? What happens then?
Reality is this: the provider wants a revenue stream; needs a revenue stream to stay afloat.
People are hired and fired, new business divisions(MPS)are created or disolved based on these revenue streams.
Loss of even one stream has a ripple effect throughout the organization - not just in equipment but in jobs, etc.
I believe in a guarantee of some sort - and I have seen different types over the years.
I am not sure which is the best, but I am in favor of the "credit" type based on cost savings or some sort of financial target.
Just some thoughts -
Again, thanks for coming to the blog and keep coming back.