If you are like folks at many firms, you may be wondering, how you’re going to pay for the cost of upcoming technology implementations. When proposing technology upgrades and new technology acquisitions to senior partners and other key decision-makers, it is good to have a handle on the various purchase options available.
There are many different options a firm can consider to pay for its technology. The advantages and disadvantages of using cash, bank loans or lease financing are explored below.
Paying Cash for Technology
There are numerous advantages to paying cash such as no financing fees or interest. There is no confusion regarding price, and the technology is yours after the purchase. In some cases, owning the equipment, especially technology that you plan to keep longer than five years, will provide flexibility for your firm.
Although paying cash may seem like the best solution at first glance, there are obvious disadvantages to acquiring your firm’s equipment this way. First of all, when you purchase the equipment, you are required to depreciate it over five years (according to GAAP and IRS tax standards) even though it may have a shorter useful life. Additionally, it may be difficult to gain internal approval for the entire cost of replacing aging technology. Lastly, in many cases, your firm’s cash may be put to better use by investing it or growing your firm.
Bank Financing
Many firms also use bank loans to finance technology acquisitions. This is a great option for equipment with a useful life of five years or more. Many firms feel comfortable using their existing bank for financing their I.T. projects. In some cases, working with banks that are also firm clients can be advantageous from a business and/or political standpoint. As with purchasing the equipment with cash, bank loans eventually lead to ownership which may be a plus for the firm.
On the down side, bank loans can often require an excessive amount of paperwork. Also, there is an interest expense when incurring a loan. Compared to purchasing or leasing equipment, loans can be fairly inflexible and include such things as partner guarantees, cross collateral securitization and bank covenants.
Lease Financing
Some key advantages to leasing include conserving cash, keeping bank lines of credit open and avoiding phantom income by expensing the lease payments over the useful life of the technology. Additionally, leasing offers many flexible options such as: true operating lease structures, modified payment plans, technology exchange programs and more. Leasing also requires very little money up front. One of the most important advantages to leasing is the protection that it gives your firm from equipment obsolescence. Because you do not own the equipment, you will not be caught with out-of-date technology. Disposing or selling the equipment at the end of the lease will be the lessor’s responsibility.
On the other hand, leasing is an unregulated industry, and there exists the opportunity to take advantage of uneducated lessees. A firm must be cognizant of the terms and conditions in all lease documentation.
Many leasing companies will try to lure firms into lease agreements by offering very low rates. Unfortunately, artificially low rates often go hand-in-hand with egregious terms and conditions (i.e., excessive installation costs, unreasonable return provisions, miscellaneous fees, one-sided end-of-term options, etc.). It is necessary to review the lease and all related documents in their entirety and to work with a leasing company that has a good reputation in the legal community.
Another possible downside to leasing has to do with the treatment of software. It is very important to make sure that your technology lease treats your hardware and software separately. It is also important that you maintain the right-to-use your leased software at the end of the lease term. Specifically, make sure there is a provision in the lease stating that the end-of-term value determined for the hardware does not include any value relating to software licenses.
Before you decide which financing option is best for your firm, consider the following:
§ What type of equipment is your firm planning to finance?
§ How long will you realistically be using this equipment?
§ Do you have software and other related costs that you will need to include such as consulting, integration and training?
Having a full understanding of your firm’s needs before you consider your financing options will enable you to make the right technological and financial decision for your firm.
About our author . . .
Jennifer Volz is Vice President in the Legal Services Group of U.S. Bancorp Oliver-Allen Technology Leasing (USBOATL). Since 1973, USBOATL has helped over 200 law firms acquire needed computer hardware, software and related services by offering customized and highly competitive lease financing.