purchasing your security system – lease versus buy

By Greg Riedel, CFO

The fall season begins that time of year when most managers and executives develop and finalize operating plans for the following year. In today’s ever-changing technology environment, numerous capital projects will compete for finite capital budgets for approval. In the coming months, winning projects will be funded, staffed and implemented. Historically, losers will be left to hope for a better outcome next year.

Failure to secure appropriations for strategically imperative projects represent the worst “lose – lose” result. Businesses suffer from productivity losses from using outdated equipment/systems and risk creating highly visible competitive disadvantages. These losses are especially magnified when such projects, like integrated security systems which incorporate Internet Protocol (IP) based capabilities, deliver environments that best ensure employee and customer safety and properly safeguard company assets.

Fortunately, capital appropriation isn’t the only method to secure project funding. Equipment leasing programs represent a viable alternative to outright purchase when capital budgets are allocated to other initiatives or are insufficient to provide for necessary business investments. Should your business consider leasing or buying equipment? As usual, the answer depends.

Leasing is a viable option for businesses that have limited capital and/or have numerous projects requiring more immediate implementation. Leasing benefits include:

• Minimal cash flow impact by providing the opportunity to “pay as you go” and properly align equipment funding over the period of time when benefits and savings are realized.

• Flexible payment plans tailored with customized lease terms with consideration or “end-of-lease” equipment value, cash flow availability and the equipment’s useful life.

• Capital preservation for unplanned requirements. These unplanned requirements are more prevalent in businesses experiencing rapid expansion.

• Potential tax advantages from the deductibility of lease payments.

Leases may also be structured with or without ownership rights at the end of the lease term. While equipment ownership is usually considered an advantage, ownership may be a disadvantage when acquiring high-tech equipment subject to rapid devaluation and obsolescence. Leasing creates the opportunity to avoid the hassle of divesting in aged, unwanted equipment.

Purchasing equipment may be the best option for well-funded established businesses as leasing has certain disadvantages as follows:

• The one certainty with respect to leasing is that the cumulative lease payments and “end-of-lease” buyout option for any lease will be greater than the up front purchase price for the related equipment. The difference represents the implied interest costs and transaction fees that are included in the monthly lease payments. With interest rates at all time lows, qualified customers should be able to secure highly competitive interest rates. These rates should be compared against the project’s return on investments (“ROI”) as justification for approval. These advantages should continue even when currently contemplated increases in federal interest rates are implemented and commercial interest rates are adjusted accordingly.

• A lease creates an obligation to make payments for the entire negotiated lease term even if you stop using the equipment. Some leases provide a cancellation option if your business changes direction; however early termination fees may apply.

• Leases may result in non-ownership at the end of the lease term and unless the equipment has become obsolete, lack of ownership may be a significant disadvantage.

• Equipment purchases create depreciation expenses that could provide tax benefits greater than those realized from the tax deductibility of lease payments.

Lease versus purchase decisions should be based on active consideration of the advantages and disadvantages summarized above. Buyers should seek out equipment and system providers that can offer both purchase and lease options. Additionally, buyers should reach out to their bankers and related financial advisors for comparative analysis. Coupling these analyses with an understanding of overall capital availability will identify the appropriate option to acquire equipment. ■