Business equipment: Whether to buy or lease?

New and existing companies require expensive business equipment. Everything from copiers and printers to fax machines, telephone systems and digital scanners help owners and employees operate on a daily basis. All of these pieces of equipment can be quite expensive. According to local office equipment

Businesses have the option of buying or leasing this equipment, and there are many determining factors that affect this decision.

A finance lease is a full-payout, non-cancelable agreement in which the lessee is responsible for maintenance, taxes and insurance. Finance leases are most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment's residual value to be high.

These leases are structured as equipment financing agreements with residuals up to 10 percent. The lessee purchases the equipment upon lease termination at a pre-agreed amount. The term of a finance lease tends to be longer, nearly covering the useful life of the equipment.

An operating lease is attractive to companies that continually update or replace equipment and want to use the equipment without ownership but also want to return equipment at lease end and avoid technological obsolescence. This type of lease usually results in the lowest payment of any financing alternatives and is a good strategy for bypassing capital budgeting constraints.

The operating lease usually qualifies for off-balance-sheet treatment and can result in improved return on investment, according to the Equipment Leasing Association. It can also result in higher reported earnings in the early years of the lease.

Depending on how much capital a company has to spend and how much use the equipment gets on a daily basis, buying or leasing has certain advantages and disadvantages.

Large companies often have more capital to invest in buying large pieces of equipment, but if employees use the equipment quite often, it can decrease the life of the copier, fax, etc. Smaller or new businesses may not have upfront capital to purchase equipment that costs quite a bit of money, even though they may use it less.

When companies decide to lease equipment, they must decide between the finance lease and the operating lease. The type of lease a business selects should match their equipment needs, goals and cash-flow requirements. For example, some lessees need one piece of equipment that requires a single contract. Other companies may need to continually acquire equipment and want to use a master lease that allows them to obtain many items within a single lease to avoid executing a new contract with each piece of equipment.

There are three ways to finance equipment.

* A lessee can select and order the equipment and seek financing through a lessor. For example, a business can go to a local office equipment company to obtain equipment and then lease through one of the office's financing alternatives (usually a separate leasing company).

* A lessee can obtain the equipment directly through a lessor. Often in this situation the lessor is the office equipment company.

* A lessee can select the equipment by working with a vendor or manufacturer that offers leasing through its own subsidiary.

As local businesses try to compete and grow, many are looking for proven ways to address their equipment financing challenges. For them, an operating lease may be the answer.

Local Options

Diane Johnson, public relations consultant for the Equipment Leasing Association, says many firms are anticipating new business and growth this year and need to think about equipment they'll need - computers, copiers, telephone systems, manufacturing equipment and truck fleets, among others.

According to Johnson, leasing continues to be the most widely used method of asset-based financing in the United States, and was estimated to be a $208 billion industry in 2003. Local office equipment companies agree and say the majority of their business equipment goes out through operating leases.

Brooke Chesnut, sales associate with Lewan & Associates, says 75- 80 percent of their transactions are leases, mostly with copiers, imagers and fax machines. Generally, leases can run anywhere from one to five years. The length of the lease determines the monthly payment.

Mark Thomasson, president of Best Copy, says operating leases have many advantages. For example, he says leases don't tie up a lot of capital upfront. In addition, when a business leases equipment, it doesn't pay property tax on the equipment, which Thomasson says can run up to $20,000 for large businesses.

Plus, technology has been changing very quickly, he adds. Leasing allows companies to get into different equipment and trade up rather than ending up with a used machine that they eventually hope to sell. It's a no-worry type of situation, and the business gets an updated piece of equipment.

Thomasson says he meets with clients and asks them two general questions.

* Do you want to have the equipment in three to five years or over a longer period of time? If a company wants to keep the equipment for a long time, some companies offer equipment buyout. Buyout comes with a fair-market-value purchase option. The buyout price is determined by computing what the initial investment was and the depreciation over the term of the lease.

* Will the equipment do what the business needs it to do in three to five years? With technological advances, major strides are being made in color copiers, Thomasson says, so the cost and supplies are coming down.

Lewan & Associates offers a straight-lease option and a lease/ cost-per-copy program. The straight lease is financed through Lewan & Associates, and companies have to pay extra for service and supplies. With the cost-per-copy program, customers receive a monthly invoice that includes the hardware as well as all service and supplies. Only about 25 percent of companies who lease through Lewan choose to purchase equipment at the end of the lease.

Thomasson says 90 percent of companies who lease through Best Copy are small businesses. Though he says leasing can be more expensive, he recommends it to most of his customers.

Through a lease, customers can end up paying the entire price of equipment anyways by the end of a lease, Thomasson says. However, for those attuned to ever-changing technology or those in high- volume situations, it really is the best way to go.