Leasing
January 23, 2008
The day you sign a lease, a finance company sends a check for the machine’s sales price to your copier supplier (sometimes the finance company is a subsidiary of the copier manufacturer, but the principle still applies). Leasing is not the same as renting from the copier company.
Smart leasing
Leasing may make sense for tax reasons or for conserving cash and lines of credit. However, any lease is based on a capital value — the higher the value, the higher your monthly payments. It is important, therefore, that if you do lease a copier, you establish the value on which the lease is being based. That value should represent a discount on the list price similar to what you’d get if you were buying outright.
Our advice is to first negotiate the price of a machine and only then discuss the financing. Be advised, though, that many salespeople like to put all the focus on monthly payments, which can make the numbers seem more affordable and can disguise the real price you are paying for the equipment.
Leasing and service costs
Sometimes dealers come up with offers where your lease payments include an element for service. However, building service into your lease is not something we recommend. If you grow unhappy with the quality of service, the lease company, which is really just the finance provider, won’t want to know — if it has sent a check to the dealer, all it wants is monthly checks from you that arrive on time, and it couldn’t care less if your copier is jamming six times a day.
In fact, third-party lease companies generally aren’t even willing to enter into agreements that include service (though a blind eye may be turned in practice). The problem is that some dealers tell the customer that part of the payment covers service but tell the lease company that it is all for the equipment. This amounts to the same thing as asking a cash buyer to prepay several years’ worth of service at the time of purchase — something we definitely advise against. Different advice may apply if you are financing the copier through a lease company owned by the copier vendor.
Calculating lease payments
Monthly lease payments are determined by multiplying a “lease rate factor” — set by a financial institution — by the acquisition price of the machine. For example, if the rate factor for a 48-month lease is quoted at .0284 and if the value of a copier is $25,000, you multiply $25,000 by .0284 and come up with a figure of $710, which is your monthly payment.
Rate factors for 60-month leases are naturally lower, since more payments are made over a longer period of time. If the 48-month rate factor is .0284, then a 60-month rate factor might be around .024 (yielding a payment of $600 on the $25,000 copier). These figures are for illustration purposes only, and they are not an indication of the rate you should expect to receive — rate factors are governed by interest rates, which naturally fluctuate. But it is a good idea to be aware of rate factors since this makes it easier to compare lease finance deals independently of the deal you are striking on the equipment itself.
The end of the lease
Typically, three things can happen to a copier at the end of the lease — and you should consider at the outset which one makes most sense for you.
The first option gives you the right to assume ownership of the equipment for a nominal payment of a dollar. This way, the lease payments effectively build the greatest equity in the equipment — but the payments are, as a consequence, going to be higher than with the other methods.
The second possibility is that you have the right to assume ownership when the lease expires by paying 10% of the original equipment value. This will result in lower monthly payments, and it is the option many people choose if they are unsure whether they will want to keep the equipment.
The third option is to go for a lease that allows you to assume ownership at “fair market value.” This method can be attractive to people who consider it unlikely that they will want to keep the equipment when the lease runs out. Fair-market-value leases often have the lowest monthly payments, but you are also building the least amount of equity. The price the lessor asks tends to be somewhat more than 10% of the original value, though this should be negotiable.
Tax implications
One of the benefits of leasing for many companies is that they can fully deduct the payments as an operating expense (as opposed to having to depreciate the asset value). This applies to most office equipment leases with 10% and fair-market-value buyouts. However, the Internal Revenue Service generally treats dollar-buyout leases like regular loans, which means that only the interest element is viewed as an operating expense.
Keep in mind that there are all sorts of creative and nonstandard leasing scenarios that can yield different tax treatments that may or may not suit your needs. It is best to discuss this matter with your accountant or other financial adviser.
Buyer beware
Consider several things before signing on the dotted line. For example, leasing contracts are non-cancellable. Once you’ve begun making payments, you’re hooked, and the only way out is to buy out the lease (this is usually a sum equal to the total remaining payments plus any additional buyout figure). There is no financial advantage to buying out a lease to get a new machine if you become disenchanted with the one that you have.
Another pitfall to avoid is unnecessarily long contracts. The typical leasing contract for a mid-volume copier runs for about 36 months, though purchasers of high-volume copiers sometimes go for terms as long as 60 months. This is because ordinary office copiers do not have a stellar track record for durability. (For example, if your machine becomes troublesome four years into a five-year contract, you’re still obligated to make all the payments.) In addition, the pace of technological change is such that if you’re locked into a 60-month contract, you may have to wait years before taking advantage of some exciting new development. Perhaps the most disturbing aspect of leasing is the deceptive practices used by some (though by no means all) leasing companies. For example, some lease contracts do not require the finance company to notify you of the lease’s expiration, and if you continue paying, your obligations are extended beyond the original term. These so-called ever-green clauses allow leasing companies to charge additional sums beyond the cost of paying for the equipment. Always assume that the responsibility for keeping track of payments is yours — you have too much to lose if you do not.
Finally, some reputable leasing companies do have a policy of sending notices regarding the termination of their leases. You just have to read the fine print on the back of the lease contract to find out if you’re dealing with one of them. -
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