“It’s inexplicable, but the low-cost system I sold you seems woefully underpowered. You could replace it with another vendor’s system, thus showing everybody you made a mistake. Or you can pay my outrageous upgrade fees.” says Catbert to Pointy Haired Boss.
Pointy Haired Boss replies: “How big a fool do you think I am?”
Catbert: “I won’t know until I see if you go for the lease option”
There aren’t many jokes about leasing. I have been looking for over 20 years. There is however that one Dilbert cartoon in 1995!
Technology leasing , particularly software leasing, has been in the news lately:
- Microsoft cut its rates for leasing software by 26% (although it looks as if it will recover some of that through insisting you take out software assurance maintenance.)
- IT software leasing is set to become “more important” as costs increase, according to German lessors attending CeBIT (well they would say that wouldn’t they?)
Leasing isnt going to totally transform the business case for your project. However used wisely it can overcome issues, particularly with the cashflow. It can avoid the upfront capital cost (particularly if the capex wasn’t in this years budget) and match the cashflows to the timing of benefits – even seasonal (like farmers paying more for their tractors during harvest times).
Just watch out for a few pitfalls:
- Lease rates: the rentals seem lower than the repayments on an equivalent loan. but include all cashflows in your comparison, including the value of the asset at the end of the lease.
- Discounts: if the lease rates are lower (often trumpeted as 0% finance) that may be achieved by a subsidy from the supplier – which you might have got as a discount off the price instead.
- End of lease term: Check what happens at the end of the lease. Most likely if you don’t return the equipment you will carry on paying rentals at the same rate which quickly changes the costs of your project. (although if you do need to carry on using the equipment, negotiate with the finance company. They will still make more money from a reduced rental than if you send back the equipment)
- Are you allowed to lease? UK public sector organisations will not be able to lease (as it counts as PSBR unless it comes under the private finance initiative). Check with your CFO on their policy to leasing as early as possible.
- It’s not SAAS: Most importantly once the lease has started you have accepted the asset. If you have a dispute with the supplier, you can’t stop paying the rentals – as they are due to the finance company. If you don’t need the asset any more you can’t just return it, unless you settle with the finance company.
- Don’t sign that finance agreement until you have reviewed it with a financial and legal adviser.
- As with any project you can work out the NPV /IRR of the lease vs buying.
- As with any project assess the risks and you can easily model the cost impact of the risks – if you need to terminate early or carry on using the equipment.
As I said there aren’t many jokes about leasing. Just make sure that you analyse the full costs, benefits and risks, or else the joke will be on you.