Leasing vs. Purchasing, Concerns and Responses

Many clients we deal with on a daily basis still don't fully appreciate all the financial benefits of leasing.

When we discuss financing options with your clients, it's natural that those who are new to leasing their equipment will be reluctant to change their ways. But understanding their concerns and helping them overcome their objections can help them take advantage of all the benefits of leasing.

The following are common concerns/objections to leasing we hear from prospective clients.

• Why do you want to purchase instead of lease?
• How will you finance your purchase?

Why do you want to purchase instead of lease?

We Suggest:
"Let's look more closely at your 'policy'."This is frequently the first reaction we hear from financing-averse prospects. In fact, such "purchase only policies" rarely, if ever, exist. It's much more likely that the prospect purchases equipment out of habit, rather than because of an actual, written policy. And once we explain how financing works and they understand how beneficial leasing their next equipment acquisition can be, that "policy" can be quickly forgotten.

2) Client answer:
"We've got cash, and cash is free.

We Suggest:
"Cash isn't free and it's a limited assetThe prospect of avoiding interest and financing charges by paying cash is pretty attractive to some clients. But cash isn't free. It's a limited asset, and there may be better ways to use it than tying it up in a depreciating asset. Keeping cash on hand makes it easier to seize a business opportunity before your competitor can arrange financing, or to weather a downturn that cripples your competition. By spending cash, the client can also lose the tax advantages and residual-value benefits that leasing provides. (The residual value is the amount that the lessor can expect to recover by selling the asset after the lease ends.) Ultimately, using cash to invest in their business provides returns that are far higher than the interest rate of a lease.

3) Client answer:
"We keep our assets for at least four years, so owning is cheaper than leasing."

We Suggest:
"Owning ties up cash and may still be more expensive."A client that does a net present-value comparison between lease and purchase, may conclude than owning is cheaper. But as we showed above, the cost of cash is usually higher than the debt rate. Cash is a scarce asset on the balance sheet, and a reasonable position is to use the Weighted Average Cost of Capital as the discount factor. Even if the client believes today that the equipment will be kept for a long time, a lot of things can change. A 36-month fair market value (FMV) lease preserves substantial future flexibility at little or no additional cost.

How will you finance your purchase?

We Suggest:
"Leasing can be more cost effective than short-term creditShort-term credit is an important resource to financial managers. But even when rates are comparatively low, and particularly in a challenging economic environment when short-term credit is often hard to come by, it makes more sense to use an external, cost-effective source of financing for equipment investments, and to preserve short-term credit for other core investments.A fixed-rate lease ensures a regular, low monthly payment that's easy to budget for. It reduces the total cost of ownership, since the lease payment reflects the residual value. It also eliminates end-of-lease disposal issues. And a hardware lease helps our client meet changing capacity requirements by letting them add or upgrade systems at any time during the lease term. Short-term credit offers none of these advantages.

2) Client answer:
"We have a good line of credit at our bank."

We Suggest:
"A line of credit is limited and often has significant additional costs associated with it."A line of credit typically has to be secured by $5 to $10 of high-quality assets for every $1 borrowed, which makes it a limited resource that should be kept in reserve for items that cannot be financed any other way. Lines of credit are also usually short-term funded, so there is a substantial risk of interest rates going up over time. Financing's leasing rates are fixed over the entire leasing period, which makes forecasting and budgeting much easier. Finally, lines of credit often require the client to pay additional fees or incur additional costs, such as reporting inventory or AR levels.

3) Client answer:
"We'll just get a term loan."

We Suggest:
"Term loans often have terms and conditions that can add additional costs and complexity."If the client is considering a term loan, they should carefully consider all of the terms and conditions that may come with it. There are usually fees involved, and the client may be asked to make a down payment or to keep compensating balances. These are all additional expenses that a lease will not incur.When compared to obtaining financing through a bank or other financial organization, remember the added value that Leasing brings. Leasing helps our clients keep up with technology by letting them replace or upgrade equipment either mid-term or at end of lease. ACP can structure a lease that rolls hardware, software and services into a single contract with a single periodic invoice, simplifying budgeting.