From our conversations with businesses across Australia, both in consultation and as part of quarterly research conducted by East & Partners (1) on our behalf, we are hearing that views on IT are evolving. However, the approach to funding remains largely unchanged. Cash is still by far the most common choice.
By paying cash up front for IT and technology-based equipment, businesses are effectively prepaying IT expenses many years in advance without knowing how their needs will change during that time. IT hardware can lose its value over time and there are lots of hidden costs; installing the equipment, maintaining and managing the assets, and removing any data once it reaches end-of-life.
It does appear that the tide is turning. The latest survey1 has shown that 22.2% of businesses considering equipment finance intend to use it for technology.
By leasing this IT equipment, businesses can transfer the ownership risk to the lender, because they’re the ones who own it. In addition, the financing costs could be claimed as an operating expense. Also, leasing can free up cash flow for other business purposes.
How an operating lease works
The lender pays the supplier for the customer’s equipment, and then leases/rents the equipment to the customer over an agreed term — usually two to three years. At the end of the term, they can choose to:
- Hand the equipment back and get updated models;
- Extend the rental term month on month, providing time to evaluate costs, financing options and newer technologies before making a decision;
- Offer to buy the IT equipment at market value; or,
- Use a combination of all three options.
Tips for leasing IT
1. Use an asset management solution to manage your IT equipment for the whole life cycle, including removal at end-of-life.
2. Look for return clauses in contracts, it should be simple to return the assets.
3. Ask your IT provider how they protect your security by wiping data from your equipment when you return it.
4. Review contracts regularly and look for ways your lender could make them more flexible.
5. Make sure you have a clear understanding of your annual IT spend. Consider talking to an Asset Finance specialist about different finance options, and consult your accountant to help choose the right option for you.