When to lease, when to buy and when to rent
Published: 08 July, 2011
With equipment budgets growing ever tighter in the current tough financial climate, more and more firms are putting greater emphasis on the business case for procurement before investing. Nigel Brown, Microlease CEO, explores the options available to businesses requiring test and measurement equipment.
However your procurement cycle is organised, there is no escaping the fact that buying electronic test and measurement equipment requires cash, capital and commitment. Many of the instruments are specialist, with complex technology, so it’s not just the purchase price that has to be considered; there are also the lifecycle costs.
I would always advise a company to begin by assessing the frequency and period of use for their test and measurement equipment. Firms are then in a better position to weigh up the benefits of purchasing an instrument versus renting or leasing, before making an investment.
Leasing offers a simple, cost-effective solution for companies seeking equipment for longer periods of time and in the test and measurement industry can be a viable alternative to purchasing an instrument outright. Typically, contracts are fixed between three and five years and, as this is shorter than the lifespan of the equipment, you pay significantly much less than the equivalent cost of ownership.
The primary benefits are financial, as leasing can save capital, improve cash flow and greatly reduce the cost of ownership. The equivalent cost of ownership is, on average, 25% higher than leasing.
The majority of lease agreements rarely require a hefty down payment. Payments are fixed over the term of the agreement, which also means that companies can manage their budgets more effectively. As the costs are an operating expense rather than capital expenditure, leasing is more tax efficient, as businesses can usually deduct the cost of lease rentals from taxable income, rather than claiming capital allowances against a purchased asset.
In addition to financial rewards, the leasing option can also be beneficial in terms of keeping equipment up-to-date without the financial burden of maintenance, calibration, obsolescence and repair costs. With a lease, this burden is left to the leasing company so, when the lease expires, there is the flexibility to upgrade or return the equipment.
Leasing options can also be tailored to suit individual business needs, with the choice of a simple lease at a competitive rate, or a lease with manufacturer services bundled in under one simple monthly charge. Alternatively, for a fully-outsourced solution, it is possible to add management services.
The decision to buy should predominantly be based on the length of time instruments are needed and the demand for usage. Generally, if a business needs the equipment for more than three years - and it is going to be used frequently - the decision is often made to purchase rather than lease.
Buying is used in sectors such as the defence industry where a proportion of the budget, sometimes funded by state agencies has been designated for test and measurement equipment. In some cases, not using the allocated amount for equipment could have implications for future budgets.
Typically, firms that decide to buy tend to be those that prefer to use their capital budgets to obtain equipment and own it outright because they are not measured on capital expenditure. In some cases, the reason for buying is historical as, only a few years ago, renting and leasing deals in the sector did not exist. Now companies have got the choice - and the opportunity - to enjoy greater financial flexibility.
The types of equipment that are most commonly bought are the low-end instruments such as power supplies and general-purpose test equipment. Technology for test and measurement instruments tends to change in three to five year cycles and, with this type of instrument, the technology would not date as much or as quickly, or require constant upgrades, so it could still be used for the same purpose in ten years’ time.
Finally, it is also worth considering that it is still possible to benefit from high-quality at a lower-cost when investing in pre-owned equipment.
Many of the instruments used in the field of electronic test and measurement equipment are specialist and contain complex technology. When procuring this equipment it is not just the purchase price that must be considered but also the lifecycle costs.
Often, there is a substantial difference between the initial expense and the ongoing support costs. In fact, on average a high-quality piece of equipment works out at double the original purchase price because of the comprehensive maintenance, upgrades, capital funding and ongoing management and tracking costs.
The fundamental requirement of a piece of test and measurement equipment is that it measures the required parameters to a defined degree of precision. In order to cope with the ever-changing needs of the user, a revision to the software and hardware may be needed. Renting removes both the cost and time of managing the equipment, enabling access to the required instrumentation without the added responsibility of managing the calibration, maintenance, repairs and upgrades.
Another major advantage of renting is that a business can afford to perform short-term projects, without large cash outlays. It also allows companies the flexibility to change or upgrade equipment and reduces the cost of maintaining equipment in-house. Renting provides access to the most modern and advanced instruments for a small percentage of the purchase cost so companies who cannot afford to buy equipment outright can still get the latest equipment. A set rental payment also buys the company’s expertise and specialist technical knowledge of the most up-to-date products.
Whether businesses choose to rent, lease or buy their test and measurement equipment depends largely on the type of equipment needed, the expected utilisation and the financial priorities of the organisation. In today’s competitive market place it is essential that companies have access to the best equipment for the right price. Many of the financial packages available through the test and measurement companies are flexible and can be tailored to suit the customer’s needs. The options of renting, leasing or buying are varied but the end result is always the same - businesses can lower their costs and improve efficiency.
For further information please visit: http://www.microlease.com/