On the subject of how best to acquire office equipment and supplies, for the small to medium sized business enterprise the first step must always be to contact a financial adviser to discuss how best to make the acquisition. In this summary, however, I offer some pointers to outline possible routes to a cost-effctive acquisition. Outright purchase or leasing are broadly speaking, the usual choices, with hire-purchase schemes making a third route to explore.
Purchasing an asset is nearly always the most convenient method of acquisition. However, in some cases, especially for some high-end multifunctional office equipment purchases, purchasing may be seen as impossible because of lack of funds in the current finacial year, or in any case a high cost which discourages those all-important upgrades toward a more efficient, productive business.
However, many companies have found that Leasing becomes a favourable option, if necessary by funding from an agreed budget deficit against under spending in future years. Several options now exist where leasing can provide the best overall value for money.
To expand on this, some different ways of obtaining higher-cost equipment are outlined below. This is a brief summary only, designed to assist with conversations with suppliers or with internal finance departments.
Office Equipment Leasing vs. Hiring or Rental
The Equipment Leasing Association defines a lease as “A contract between lessor and lessee for hire of a specific asset selected from a manufacturer or vendor of such assets by lessee”. In this scenario, ownership stays with the lessor. The lessee has possession and use of the goods over a period on payment of the specified rentals.
This system is different from hiring (including rental and contract hire). Hiring requires the user to select from specialised stock already held by the hiring organisation which usually charges a fixed tariff. Leasing enables the user to select the goods from a manufacturer or other supplier of the required goods.
A lease is negotiated usually on terms specific to the deal, with the lessor. The lessor acquires the goods chosen by the lessee. Uniquely, this can allow the lessee to use the goods by making payments out of revenue. Office equipment (including photocopiers and fax machines) and furniture, cars and commercial vehicles, computers, machine tools, laboratory equipment and contractors’ plant are allcandidates for leasing.
Some Advantages of Leasing:
– All costs are fixed in advance, so budgeting is exact
– Goods cannot be wihdrawn once the contract is signed (as long as agreed conditions are complied with.
– Removes the need to tie up capital.
– Allowances, depreciation and other calculations are not required
– Leasing is simply about the rental cost.
– Leasing releases capital which may not be available elsewhere.
– Leasing is inflation-proof as payments are made out of future funds, in fixed money terms. Hence real costs fall against any inflation.
– Possibility of immediate use of cost-saving equipment.
Some Disadvantages of Leasing:
– It is generally not possible to dispose of the goods before the end of the lease.
– The asset is not owned.
– Funds must be allocated to pay the lease throughout its duration.
Financial and Operating Leases
Broadly, two types of leasing arrangements can be considered. On the one hand, Financial Leases can be good value, where an organisation’s buying power does not enable it to negotiate the best one-off price against latest office equipment releases. On the other hand, Operational Leases may provide the best value when risks associated with technological change and servicing costs are taken into account.
(A) Financial Leases
Here the lessor who arranges the lease terms has no interest in the transaction apart from the supply of finance. What happens is, the lessor pays for the goods and becomes the owner. The money paid by the lessee covers the capital cost of the goods, a service charge to cover lessor’s overheads in arranging the lease, interest charges and some profit for the lessor. The purpose of this type of lease is only to provide finance to the lessee, against the security of the goods themselves. The lessee is responsible for maintenance and insurance.
(B) Operating Leases
This type of lease is mainly undertaken by manufacturers or suppliers to help sell products which tend to be specialised or very technical. In this scenarion, the goods are always wholly amortised during the period of the lease. Moreover, the lessor is responsible for servicing, maintenance and the updating of equipment. This type of lease enables the lessee to avoid some of the risks of ownership such as obsolescence. A classic area where this type of lease is extremely useful is inc the provision of Photocopiers or mulifunctional, networked office equipment. Such equipment can be obtained on an operational lease under the terms of an official contract which calculates payments in terms of a price per copy.
Footnote: Hire Purchase
Also sometimes called Lease Purchase, the operation of such a contract is very similar to a lease. Payments are made at an agreed rate and for an agreed duration, but the important difference is that ownership of the asset does pass to the customer. For the higher risk to the the company providing the hire-purchase plan, the costs are greater.