Leasing Contracts: Not All Are Equal

Meeting zu Dritt
Beware of the fine print of a contract to always get the best deal

 

While leasing of IT equipment is better financially for most, the advantages are achieved only if lessees are aware of and carefully negotiate the terms of the leasing contract. Otherwise, the savings that leasing provides will disappear at the end of the contract term. Most executives assume that the bulk of the contract is just standard boilerplate and must be accepted “as is.” However, every lessor has its own version of the boilerplate, and the variances can mean the difference between a good deal and a bad one.

 

 

 

Key Components

The most important aspect of any deal is the ability to return the hardware on time. The value of a lease is tied to four things: price, residual value, term and interest rate. Usually, the buyer can negotiate the purchase price. Just because one is leasing does not mean that one needs to pay list price. Negotiate the best deal with the hardware vendor first, and then discuss leasing based on the discounted price. The monthly payment will also be determined by the interest rates, which can vary significantly based on the term length and the residual value, which the lessor assumes the equipment is worth when it is returned. If the hardware is not returned on time and the lease is extended at the same monthly rate, it is possible the total cost of the lease will end up being more than if one purchased the equipment. Thus, asset management is key to making sure the company does not end up overpaying for the equipment.

Let’s look at an example: If one buys a $1,000 PC and leases it for three years, the likely residual value should be in the 10- to 15-percent range. For argument’s sake, let’s use 15 percent. Then, the lease payment will be based on $850 and not the full $1,000. If the interest rate is 3 percent, then the monthly payment is $25.05. (Leasing interest rates are usually far better than bank financing rates for equipment purchases.) Forgetting tax implications, if the lease is extended six months at the same payment rate, one might as well have bought the equipment, as the full price has been paid.

Asset management is important, because lessors have different terms and conditions relating to the return of equipment. Some lessors will inform you in sufficient time that the lease is coming to an end and appropriate arrangements can be made so that the return date is not missed. Other lessors may inform you (no commitment) and may have terms stating that if the lessee does not let them know by a particular date, the lease will automatically be extended—sometimes as much as six months. This “boilerplate” fine print can be a killer. Thus, if one does not want to rely upon the vendor’s willingness to be flexible and disregard the contract, it is important to have one’s own asset management capability that enables the company to notify the lessor on time and then return the equipment as specified within the required time frame.

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