In recent years, leasing has emerged as the preferred method for acquiring technology and equipment. Industry studies show that more equipment is acquired through leasing today (a full 68%) than by cash, with 78% of all businesses opting for equipment financing.1
What may surprise you is that companies that finance their equipment, select leasing more often than cash and loans combined as their tool of choice for all equipment types (see Figure 1)2.
When asked why they prefer lease financing over cash, it turns out that their top reason is not about 'finance' at all, but about avoiding the obsolescence costs associated with buying and owning technology assets (see Figure 2)3.
Technology obsolescence risk takes two forms: technical (rising support and maintenance costs) and business utility (depreciation-based inertia). Here’s a brief look at both and why lease financing is used so often:
Technical Obsolescence: We know from 10+ years of studies of technology life cycles that equipment requires more maintenance, upgrades, repairs, and help-desk support each year of its life span. If you bought the equipment, you normally are required (by the Finance department) to keep it for its full depreciation cycle and beyond—typically longer than you would prefer. If you had leased the asset, you could turn it in at the end of the term and replace it with new technology typically at the same or lower monthly expense.
Business Utility Obsolescence: This is where you’re 'stuck’ with the current/aging technology (due to depreciation lock-in or accounting policy for purchased assets) when a newer, better, faster, easier, cheaper alternative has become available. The current technology, which is still working fine, is no longer optimal or may not meet the operational objectives any longer. Newer technologies from your best equipment partners are available, but you can’t replace the old units due to accounting constraints. If you had leased them, you could move to new gear, start reaping the benefits of innovation, and roll the leases into new ones—with minimal economic impact. Leasing allows maximum flexibility, enabling you to capitalize on innovations being developed by your equipment providers.
While leasing may save money (under federal accounting standards, operating leases for equipment mandate cash savings of at least 10% of equipment costs), it is mainly used as an economically-sound tool that allows companies to adapt to changing requirements and support business vitality.
Businesses that effectively leverage this tool cite these benefits4:
1. Reducing costs (79%)
2. Improving operational efficiency (74%)
3. Flexible upgrade options (72%)
4. Flexible terms and conditions (70%)
5. Ability to lease or finance new equipment types (70%)
6. Managing and reducing risk (63%)
7. Conserving capital (62%)
8. Ability to finance total solutions, including bundled hardware, software, and services (55%)
These references to 'flexible' and 'efficient' and 'new equipment types' underscore the real value of lease finance as a powerful business tool in our increasingly technology-dependent business world.
Author: Glenn M. Miller, CTO Research and Strategy Services, Huntington Technology Finance. For more information contact Craig Seipel, National Account Manager, Huntington Technology Finance, (614) 832-5290, email@example.com.
1. 2015 State of the Equipment Finance Industry, Keybridge LLC
2. U.S. Equipment Finance Market Study: 2016-2017, ELFA
3. Combined responses from Global Insight (2007); IDC (2010, 2012), U.S. Equipment Finance Market Study (2016).
4. IT Buyer Perceptions, Strategies and Requirements: Results of IDC's 2012 IT Leasing and Financing Survey, Jennifer Koppy, IDC, June 2010, page 6.
Disclaimer: This article is provided for information only and is not intended to be relied upon as legal, financial, accounting, tax or other professional advice. Before acting on any information, you should consult with qualified professional advisors and consider your particular objectives, financial situation and needs.