Activity in Alberta’s oil patch has started to pick up, but it’s a slow climb. Companies that are anticipating increased activity are already being to consider their infrastructure needs, including communications, however the need to exercise caution is still strong. In this atmosphere, is it better to rent, purchase or lease?
That is dependant on a variety of factors that should be carefully considered. The market is showing some uncertainty. Many companies have been hesitant to purchase equipment outright, or lease radio systems for more than a year term, as they don’t know what the future holds. However, firms still require effective communications tools to ensure jobs are being completed at peak efficiency. Most companies will allow communications and IT managers – in collaboration with the chief financial officer – to opt for purchase, renting or leasing, while a smaller firm might make that decision based on input from a service provider or his accountant.
There is no single fit solution: unique solutions are required for companies experiencing different circumstances. There are many considerations: tax situations, financial conditions and the varied effects leasing, buying or renting will have on each opportunity in both the short and long term.
Renting Radio Equipment – Contractors can conserve capital with a rental.
Many companies stick to rentals as they can simply flow the cost through to the contracted customer.
On short term projects this can make the most sense. On a straight rental the radio dealer maintains the unit, so the contractor avoids the expense of upkeep. Also if a piece of equipment breaks down, the dealer will fix it, and if the repair will take an extended amount of time, the dealer will usually exchange the broken unit for a different one.
Long term rentals however, are much more expensive than a lease or purchase, because there is more flexibility and you are not committed to anything. Most often however, on long term or annually repeating projects it makes better sense to lease to own or purchase and negotiate with the service provider for a managed service contract.
Purchasing the Radio Equipment – The financial advantages are on your balance sheet.
Buying equipment offers immediate ownership, and deductions for depreciation and interest can bring down a firm’s taxable income and save the company on its taxes. More often, a larger company will finance the purchase of a piece of equipment. The equipment is added to the balance sheet as an asset, and the debt is noted as a liability. The depreciation and interest are used as deductions to income on their income statement. If your company has a cash reserve it is often advantageous to buy these resources outright.
Lease or Lease to Own – When cash is scarce.
Leasing offers a usage arrangement that typically requires very little cash up front. Options available mean the lease payments can be equal to the cost of principal and interest, because of a balloon payments or purchase buy-out options at the end of the term. The buy-out price might be negotiated at the beginning of the agreement, or the deal could include a fair-market payment at the end.
Basically, the customer can use the equipment and have a small buyout clause that allows them to take ownership of the equipment. This can dramatically increase their profits by continuing to invoice future project contracts for the equipment as though they were renting, while in reality only having a small maintenance fee from the service provider. Companies can write off each lease payment as an expense on their taxes. The lessor keeps the depreciation and passes on that benefit to the lessee in the form of a lower lease payment. Additionally, leases typically are structured as an off balance sheet product, with the lease payments taken off as an expense of doing business.
So what is the right choice?
Typically if a company is renting equipment for more than 9 to 12 months they should very closely examine with their accounting department the long term benefits of lease to purchase combined with managed service contracts for their radio fleets.
An experienced communications consultant can provide guidance on how to make the best decisions for your needs, budget and financial considerations. If you’re interested in contacting myself, or any of the Sales Consultants at Westcan ACS, to help you review your budgetary numbers and devise a cost effective strategy going forward, you can use the form below. We look forward to helping you.