Leasing technology? Here’s what you should bear in mind

As with several initiatives, organisations are gaining a competitive advantage by leasing disruptive technology and equipment.

However, determining which leasing option will be best for a firm can be tough. Hence, before making a decision to lease technology or IT equipment, firms should scrutinise every line item in the lease contract to reduce costs and eliminate time consuming administrative tasks. 

Here’s how firms can go about leasing technology or IT equipment, thereby achieving their business objectives.

1. Determine the business needs
   The type of lease varies as per the equipment or technology required by the business. For instance, if a financial institution depends on the latest technological trends, it will need a short lease term, enabling the firm to upgrade to the latest technology when required. On the other hand, if a tech firm is leasing warehouse space, a longer lease will be more advantageous.

2. Research on the potential lessors
   When choosing a suitable lessor, firms should give preference to brokers, leasing companies, or independent lessors specialising in their domain. He/she should also be willing to work on mutually-agreeable terms. Take time to research on the lessor’s background by going through his/her credit and payment history, financial statements, and corporate relationships. Further, it is critical to search public records for pending lawsuits, if any. Good lessors will readily offer flexibility in the lease contract, allowing institutions to return or purchase equipment at fair market value (FMV). Further, before making a lease decision, firms should talk to prospective lessors about their leasing options and compare them with the current market prices.

3. Ask the right questions
   Determining the most suitable leasing options can be a challenging task. Before going ahead with the lease contract, firms should consider the following to make a gainful decision.

• What’s the lease budget?

Though leasing is more cost effective than buying the IT equipment or technology, the cost needs to be incorporated in the monthly budget.

• What are the business goals?

Firms should determine the outcomes expected after leasing new equipment or technology. For instance, a firm may want to lease equipment in order to improve its productivity and reduce costs.

• What type of lease are you getting into?

Determine whether the lease is capital or operating. A capital lease is employed for long-term projects, almost five years. In contrast, an operating lease is for a short term, up to three years.

Since a capital lease is similar to a business loan, the leased equipment, technology, or warehouse space is treated as an asset on the firm’s balance sheet.

In an operating lease, the leasing company retains the ownership of the leased equipment. This type of lease is mostly preferred by small businesses as it does not tie up their capital for a long time.

• How long is the lease for?

Commercial leases including warehouse space, software licenses, and IT equipment are profitable when signed for a long period as they tend to come with a low monthly payment.

• Can new equipment or technology be added to the lease?

Businesses should check if they can add equipment or technology to the existing lease contract. Reputable lessors will readily recalculate the lease payment and work out a solution for their clients.

• How fast will the technology/equipment become obsolete?

Technology becomes obsolete in no time. Organisations leasing IT equipment or technology should consider this factor when signing the long term or short term lease contract.

• What are the conditions for termination of the contract?

What if a tech firm does not require the IT equipment any longer? What if the leased technology is outdated and needs to be upgraded? Businesses should read the fine print and determine whether the lease can be paid off early without any penalties.

4. Find a lease administrative solution that works for you

The implementation of new lease accounting IFRS 16 standards by the International Accounting Standards Board (IASB) has made it challenging for businesses to manage their lease portfolio.

According to an outsourcing survey conducted by Deloitte, 30% of respondents shared that their current lease management solution does not meet the business needs. The survey revealed that firms need a centralised solution for managing the lease data. Disruptive leasing solutions led by cloud and automation can help address the challenges in this domain, thereby improving the user experience and optimising costs.

When finding a suitable lease administration solution, consider the following tips:

• It should be a cloud-based solution

Cloud-based lease management solutions offer greater flexibility compared to the onsite one, enabling employees to access data from a web portal anytime and anywhere. This significantly reduces the time consumed in manual data entry and management of lease contracts. Cloud-based solutions are also faster to implement than onsite solutions.

• It should allow account reporting for various standards

A good lease management solution will help firms to run lease accounting reports for all the different standards, namely IFRS 16, IAS 17, and FASB ASC 842. A software that allows adaptive reporting is ideal for finance and tech firms as it helps them effectively manage their lease portfolio.

Modern lease accounting solutions also help with the complex and time-consuming calculations, allowing institutions to generate the mandatory reports required for compliance with the accounting standards.

• It should seamlessly adapt to the existing enterprise solutions

Several institutions depend on pre-existing enterprise solutions to manage their core business processes. Once installed, the lease management software should easily adapt to the firm’s ERP and accounting systems like SAP and Oracle. It should trace and collate vital documents containing lease data, thereby complying with the new lease accounting standard.

If an organisation has more than one businesses, it should look for a solution that supports all of them under one account. Further, the organisation should be able to control user access at each level. For instance, a finance accountant may require full access to the lease portfolio. However, other employees may need limited access to track key parameters and perform tasks pertaining to their job profile.

Inevitably, every business has to lease technology and IT equipment like new computers or networking hardware. Leasing helps firms stay competitive and preserve their working capital for other profitable activities. The information shared in this post will help technology and finance institutions make the right decision when leasing IT equipment or technology.