Best Practices: IT Equipment Lease Versus Buy Analysis
To decide the best way to pay for equipment, it’s essential for enterprises to perform a detailed lease vs buy analysis, comparing the cost to buy now against the future costs of leasing.
The most common approach to a lease versus buy analysis is to Net Present Value lease payment cash flows versus the cost of paying cash for the equipment.
This is a good start but to make the analysis effective here are common best practices to follow in any lease vs buy analysis:
- Determination of Total Economic Transfer. It’s not enough to consider only regular-term rents. A lease agreement contains many other costs, including retainable deposits, interim rent, potential penalties, extension rent, and buy-out requirements. Each of these elements of “all-in” cost must be considered in the analysis in order to get a true picture of which equipment sourcing solution is the best.
- Use of Valid Risk Suppositions. A critical component of accurate forecasting of total economic transfer is being able to make accurate assessments of specific risks associated with the leasing of a particular piece of equipment, such as possible technical obsolescence, difficulty of return, potential for damage, and likelihood of elevated buy-out valuation. To get a useful lease vs buy analysis, an enterprise must be realistic about the risks it faces.
- Evaluation of Past Lease Performance to Determine True Lease Costs. To arrive at accurate projections of all-in costs for future contracts, enterprises first need to perform a comprehensive analysis of active and expired leases. A thorough review of the entire equipment leasing portfolio often reveals that the all-in costs of leasing are greater than expected. With this knowledge, the lease vs. buy analysis not only becomes more precise, enterprises have support in negotiations to lower leasing costs.
- Selection of the Best-Value Vendors. Before a lease vs buy analysis is conducted, the vendor market should be diligently searched to select the vendor that offers the most value—which isn’t necessarily the lowest-rate vendor. It’s that vendor’s all-in or “fully loaded” cost that’s relevant.
- Utilization of Leasing Equipment Experts if Sufficient In-House Expertise isn’t Available. Many enterprises don’t have professionals with the specialized experience in equipment leasing that’s necessary to adequately identify the risks within leasing agreements, the true historical costs of leasing, or the best-value vendors. Equipment leasing consultants can help enterprises perform lease vs buy analyses that take into account the intricacies of the industry, including the myriad ways in which lease contracts include terms that can drive additional costs.
For enterprises to make well-informed, prudent decisions about whether to lease equipment or pay for it with debt or cash, they must perform a lease vs buy analysis. Performing this analysis properly requires extensive familiarity with how leasing companies make money, and it’s often conducted with the aid of outside experts.