Why leasing is better than paying cash for technology

November 18, 2012 03:25 pm | Updated 03:25 pm IST

Sapan Jain

Sapan Jain

At the height of the credit crisis, cash was king. With access to credit either scarce, non-existent, or expensive, cash remained the only logical way some companies could purchase the critical information technology they needed to remain competitive. When an IT acquisition became critical, many companies turned to cash for what they thought was a more cost-effective option than leasing or financing.

Ignoring the economic reasons for financing, some companies see purchasing technology with cash as just a simpler way of doing business. However, as many chief financial officers (CFOs) who have successfully weathered the financial storm can attest, there are significant benefits to leasing that can make financing technology equipment a more viable option than paying with cash.

Financial experts tell us that today’s money is generally worth more than tomorrow’s. Therefore, a company leveraging leasing to acquire a new data centre or retail point-of-sale device is actually conserving cash today for its core business, while paying for the technology flexibly over time. This allows the company to better align its investment with the expected/projected benefit and, thus, ensuring a quicker break-even for the investment.

Saving tax

From a purely tax perspective, technology leasing also trumps cash. Every cash purchase made is paid with post-tax dollars. With an average corporate tax rate today approaching 34 per cent, paying for technology equipment with cash is like adding 34 cents to every dollar that makes up the final price.

Leasing allows an enterprise to leverage pre-tax dollars. Monthly lease payments can be written off as an expense under many tax codes. With technology leasing, the leasing company owns the technology, while the customer pays for the use, writing off the payments from their taxes as a business expense. In other words: buy with cash, and pay 30 cents more; lease over time, and every dollar spent is tax-free.

Technology financing from a stable, reputable financing partner can help companies in fact save cash, capture growth and efficiently manage the entire lifecycle of their technology assets, while eliminating the risk of technology obsolescence.

Faster returns

Because of fast approval times and the quick dispensation of funds by financiers today, financing can even help accelerate the implementation of technology projects. This can lead to faster returns on investment (ROI). Of course, increased ROI has become a critical metric for CFOs today, who control much of the technology investment decisions being made at the C-Suite level.

Leasing can also help companies bring a more disciplined approach to their technology lifecycle management process. According to many IT analysts, problems with equipment generally seem to occur in the fourth year of equipment life. During that time, a company can unfortunately bear unexpected maintenance costs, lifting the total cost of ownership of their equipment.

Leasing trumps buying with cash as companies can then align the expected technology lifespan of their equipment (usually five years) with the ideal economic lifespan of 30-36 months (i.e. before anything breaks), reducing their total cost of ownership.

Further, a 36-month lease can eliminate book value write-offs faced by companies who buy with cash and depreciate their equipment over five years. If those companies decide to move to new technology assets before their original equipment is fully depreciated, they will have to write off the remaining value at a loss.

There is a growing demand for IT financing as enterprises across the world are leveraging financing and asset management solutions to enable next-generation innovation, including better infrastructure, green data centres, grids, health information technology and transportation projects.

Indeed, uncertain economic times require flexible funding alternatives. Certainly, as the economy starts to rebound, business opportunities increase and new technologies gain traction, it’s the perfect time for enterprises, small or large, to consider new and innovative IT investments to help grow business.

Today, it’s up to enterprises, small or big, to herald in dynamic financing solutions to put their businesses on track, meet their technology objectives with dynamically responsive infrastructure, and earn higher and quicker ROI. The end result will be the opportunity to reap the benefits of total IT lifecycle management support for a company’s dynamic infrastructure, from planning to acquiring, managing and retiring phases. And, having a trusted financier can make all the difference.

(The author is country executive, IBM Global Financing, IBM India/South Asia)

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