How do we finance information technology (IT) equipment? The best option might surprise you.
Technology is expensive, and like a new car that drops a hefty chunk of its value rolling off the lot, it becomes less valuable over time. It’s a major expense that needs replacement fairly often and like a new car purchase, there are two ways to finance it: purchased or leased.
When you’re sitting at a car dealership, the salesperson never fails to ask two questions. “Are you more concerned with the overall purchase price or the monthly payment,” they’ll ask? It’s quickly followed up with, “how long do you typically keep a car?”
Here’s why the answers are important: it’s a quick way to find out if they are going to sell you a car or lease one.
If the buyer typically keeps their car for five years or longer and less focused on the monthly payment, financing a purchase is usually the best option. The payments are more than a lease, but the buyer will eventually own the car free and clear. If the buyer tends to replace their car every two or three years and is focused on affordability of the monthly payment, leasing the car is the better option.
Financing information technology (IT) equipment, such as telephones, computers, servers and even computer-based manufacturing equipment is very similar. It’s an expensive purchase with a short lifespan, often becoming obsolete within a few short years, and the financing options include a purchase or lease.
Did you know we finance lease agreements, not just purchases? Read on for details.
Should you lease or buy?
Can you finance a short-term loan for IT equipment, such as a three-year loan? You can but it’s rarely done, according to Jeff Mizukami, SBA Department Manager and Senior Commercial Loan Officer at Horizon Community Bank. Today’s leases are far more attractive. The lessee can make an attractively low monthly payment, with no responsibility for equipment maintenance or insurance. And when the three year lease term is up? They’re done, ready for updated, modern replacements.
If the lifespan of the equipment is longer—perhaps five- to seven-years—then it might make sense to underwrite a loan for seven years. The longer term keeps the payments manageable. They’ll have the choice to continue using the older equipment when the loan is paid in full, or sell it to help finance a new purchase. It might make sense to the borrower, who assumes they will pay of the loan early when revenue is flowing. It seems like a smart way to manage their cash flow, but the truth is that few remember to pay a loan off early, choosing instead to put the extra cash into other important areas (like marketing or inventory), or finding their expectations for revenue don’t materialize. Instead of making extra payments to pay off the loan early, it runs the full seven years.
There’s two other reason leasing is attractive for short-term purchases like IT equipment that shouldn’t be overlooked, and they’re a powerful incentive to lease. A lease can be 100 percent financed without a down payment, and the process is fast. Applying for a lease is a simple, straightforward process, especially when compared to the application process for a conventional or SBA loan. Without the need to provide collateral and lighter proof of income requirements, approval can be virtually instant.
Don’t assume your bank can’t finance a lease agreement
Horizon Community Bank provides lease and purchase financing options, with credit officers available to discuss your options. We’ll even look at cash flow and operations for your specific business, and make recommendations for the type of financing that is in your best interests. We’re interested in your success, not just a signature on the dotted line.
If you’re considering lease financing from the equipment manufacturer or dealer, why not come in for a competitive offer? It’s never a bad idea to shop a lease the same way you’d look at the options for a purchase. Contact us today to schedule an appointment, or stop by your nearest branch. We’re here for you.