Buying or leasing? Questions to ask before signing a contract

The equipment financing process has changed in the past several years. Here are the vital questions you need to ask before pursuing a financing decision.

This article is the first in a series that follows the equipment financing process from initial brainstorming and consultation to final contract signing. In this article, we consider the broader question of buying versus leasing. There can be benefits, and risks, to both.

Our goal is to provide a neutral, balanced perspective on the buying versus leasing decision, which is one of the first decisions made by any organization that’s considering an equipment refresh.

“When we hear questions from potential clients about equipment refreshing, it’s really the same ‘lease or buy’ question that is asked at least ten different ways,” said Kevin Henze, vice president of Equipment Finance at U.S. Bank. “Sometimes the questions are best addressed in terms of front-end versus back-end, instead of looking at the complete process at once.”

Before signing any purchasing or leasing contract, businesses should evaluate which path makes the most financial and infrastructural sense for their short-term and long-term goals. 

The choice to buy outright: Greater control for longer periods

Business owners looking for a straightforward procurement process may resort to buying new technology outright. While buying offers complete internal control of the equipment, it also carries heavy initial costs. The benefit of buying is generally felt in the long-term, for equipment that doesn’t need to be updated every few years.

Still, buying equipment outright can tempt companies to keep it longer than the typical 3-4 year lifespan. While this helps save costs, it can also cause unforeseen security issues as hardware becomes outdated.

Matt Iacobucci, head of the U.S. Bank Technology Finance Group, noted that new investments in technology should start soon after the new technology becomes available. For customers purchasing the equipment upfront, it can become difficult to keep up with the release schedules of new assets.

“Maximize your investment in cutting-edge hardware by investing within six months of its release – that approach can help keep it viable,” Iacobucci said.

Buying equipment upfront pushes an organization into a balance of ownership, power and expense. 

The choice to finance: Shared ownership with flexibility and updates

On the opposite side of the procurement debate, vendors and banks offer endless opportunities to finance and space out the cost of new equipment. However, not all terms are created equal, and organizations should know what they’re signing before anything is procured.

Leasing your technology involves giving up an element of control and paying a higher cost in the long-term, for a potentially more efficient managing partnership. Several elements of system maintenance, such as security management and timely updates, can be shared between lessee and lessor.

Business should weigh several financial and technological considerations before deciding to pursue a leasing contract with a vendor or bank. Ask yourself the following questions if you choose to pursue a leasing contract.

Can your financing partner:

• Expense the leasing payments, rather than depreciate them? 
• Provide additional lines of credit if needed? 
• Proceed with projects beyond the company’s budget? 
• Provide financing documentation that’s simple to read, and avoids unnecessary legal jargon? 
• Offer you the ability to refresh tech as needed? 
• Or will this be restricted to a timetable? 
• Provide protection against equipment obsolescence beyond the warranty period? 
• Handle disposal of equipment at the lease’s end, or will you be responsible? 
• Set a fixed monthly expense within the contract?
   

The first decision many businesses make when looking to refresh their equipment is whether to buy or lease. If you decide to finance your procurement, then the next step is identifying (and avoiding) the common hidden fees and shady practices that could stifle your equipment budget. 

For more information, contact a U.S. Bank Equipment Finance specialist.