By Ming Lai
In this cash-poor era, more and more companies are considering leasing office equipment and/or furniture instead of buying it. But a lease deal, that sounds so attractive on the surface, often ends up costing lots more money by the time it has run its course. Business managers need to carefully review all the various purchase and lease options, and the costs involved, before making a definite decision.
Shop Around
You need to determine what your total cost will be. As soon as you know the type of equipment you need, start shopping, but don’t let the seller(s) know you’re even considering leasing. Always shop as if you’re paying cash. Let’s say you’re looking for an office copier. Ask each seller exactly how much he/she will sell it for. If it lists for $7,000 and you offer $6,000 cash, you’ll probably light up lots of eyes and receive immediate attention. Remember, you aren’t theonly one with a cash-poor business these days.
Figure Out What The Money Costs
Once you’ve agreed upon a figure (let’s say $6,000), determine how much it will cost you to finance that through your bank. Look at the current five-year, fixed commercial rate and how much it will cost youper month. Now you have two totals – one for the cash purchase ($6,000) and the other for the cash purchase + financing. Add the two together.
Now, ask the same seller for a lease agreement. He will probably offer you a 60-month lease on the $6,000, at about $163 a month. Look it up, and you’ll see that this is close to double the interest amount! This is the hidden cost of leasing. You’ll find that most vendors are reluctant to reveal the rate they’re going to charge, either because they haven’t bothered to figure it out or because they know they’re not competitive. Tell the vendor you need to know the built-in interest rate before you can make a final decision.
Most leasers will also want the first and last month’s payment up front, so, figure on a hefty cash outlay. Multiply the 58 remaining months with the first and last months to get a final figure. There’s also the residual payment if your firm ends up wanting to buy the copier at the end of the lease. Residuals are generally 10% of the total amount of time multiplied by the monthly rate. Total all these amounts, and the lease ends up costing you approximately $4,000 more than the original cost of the copier.
Compared to your cash purchase, that’s a huge difference. Compared to your cash + financing deal, it’s still a big difference. And all for the same piece of equipment!
Other Costs
Some lease agreements also require you to carry expensive maintenance contracts and to purchase all related supplies from the vendor. Make sure you read the fine print of all contracts. You should pay the same amount of attention to the purchases and lease deals you’re making at the office as you do to the deals you negotiate for your own car or home. And you should encourage your employees to do the same. You might even set up an incentive program, rewarding them every time they can show you that they’ve saved the company money.
So, the next time someone comes in excited by a $163 a month lease deal, tell him/her to bring you the comparison figures, then you’ll be able to decide whether purchasing or leasing will cost you more money!
