We are often asked by our clients who are looking into acquiring new IT hardware, about the purchasing options that are available and what would be best for them.
This blog is based on a podcast that we held with Richard Houle, a partner at HLH, an innovative accounting firm specialising in the construction, manufacturing, and professional services sectors. Here, we’ll explore the three main options companies have for acquiring new hardware, the pros and cons of each, and give answers to questions that we’re often asked by our clients on this topic.
The Three Main Options Businesses Have for Acquiring New IT Hardware
Let’s use a scenario to illustrate the options and considerations at play for making an economical and wise choice for your business. Imagine that you have a $50’000 budget for an IT development project that involves acquiring a new server to support it. This budget involves three key elements:
- Hardware: the server itself, a physical piece of equipment to be purchased.
- Software: To put the server into use and configure it, software and application licenses will be needed.
- Installation: getting engineers on-site to physically install the server and to get it running in coordination with the softwares that it will be utilizing.
Altogether, all three elements will cost roughly $50’000 and will be needed together to make the purchase worthwhile. These three elements all impact the available financing options for your business, compared to a more straightforward purchase such as a car.
To finance this project, businesses have three options available to them:
- Finance it yourself: this includes an outright purchase using cash as well as acquiring a loan from a bank. The idea is to purchase the equipment outright.
- Get a lease with a hardware provider: A hardware lease allows a company to rent a piece of hardware in exchange for regular payments across an agreed leasing period. It is possible to purchase the hardware after the lease, or to return it
- Hardware as a Service (HaaS): A relatively rarer but emerging method that uses a subscription-based model; a hardware provider allows your company to use the equipment on an ongoing basis in return for regular payments.
As Richard remarks, it is important to align the option you choose with your intentions, particularly how long you will be needing the hardware for, and how it fits into your plans for the future. For example, it could be sub-optimal to start a 5-year lease for a server that may not serve your growth plans in 3-years’ time and therefore need replacing.
Pros and Cons of Direct Financing, Leasing, and Hardware as a Service
Let’s go through each of the options and consider their pros and cons:
The pros of directly financing the purchase using existing cash or via a loan from a financial institution, is that it can avoid interest fees entirely if you’re buying it outright without a loan. Or, at least the added interest will cost less compared to the added costs of leasing the equipment. Your company can also benefit from the Capital Cost Allowance (CCA), the project will be fully deductible if you get the equipment and start operating it by December 2023. However, in January 2024, the deductible rate will lower again to 55% on the interest each year. In this case, 55% of the project will be deductible.
As to the cons, a key one is that the purchase can take up a bulk of your capital if its being made directly and outright. There is an opportunity cost to committing to the purchase, as the bulk of cash could be used for other opportunities or to address any emergencies that come up after the commitment to the project and its costs. Additionally, it could be harder to get a bank to approve a loan for a project depending on how long your company has been around for and its credit history, and additionally, banks may look less sympathetically at all three elements of the cost compared to leasers of IT hardware, who will also anticipate the software and labour costs for instance.
The pros of leasing would be that you can use the equipment for an amount of time that is optimal to your business and its growth plans. It can be limiting to be committed to equipment that no longer meets all of your needs. Compared to directly purchasing the hardware, leasing is also relatively better for your cashflow and keeping spare capital around for opportunities or unexpected costs that come up. Leasers will be more sympathetic of all three elements of the project in terms of being willing to finance it. A potential pro is that if by the end of the lease you would like to buy the equipment outright, it could be done with a fair market price that factors in the depreciation of the asset.
The cons of leasing are that there is an implicit interest rate that is built into the costs, which is based on the operational and financial risks of the acquisition project. In general, these will be higher than the interest rates of banks. Beware also of the terms of the contract, for instance, a 5-year lease on a product with 3-years of warranty may lead to your company being held accountable for repairing and/or replacing it if the equipment breaks down in year 4.
Hardware as a Service (HaaS)
The pros of Hardware as a Service includes that it is based on monthly payments, and that this solution can be end to end. A hardware provider can offer maintenance and support, access to software and data, and potentially help with installations, however, this will be built into the costs. This solution is also highly scalable and can be responsive to some evolving needs.
The cons though, is that you do not own the equipment and may not be able to buy it from the provider. Be careful to examine the terms of using a HaaS product, as there may be hidden costs, limitations or commitments. Of all three options, if you were to keep the hardware for the same amount of time as a lease, it is likely to be even more expensive in all. In terms of swapping out the hardware for new hardware that better meets your needs, the provider may have a set-suite of options that may not be guaranteed to meet your needs.
Some FAQs About Acquiring New Hardware
What happens if an equipment failure happens in the lease period, but the warranty has expired?
This will largely depend on the lease agreement itself, which is worth checking. It may be stipulated that the leasee is responsible for the repairs. Likewise, bearing in mind the principle of matching the term of the lease with your intentions can avoid risks such as this.
Will leasing a project also cover labour costs in addition to the hardware?
Yes, a leasing company will consider these aspects and be willing to accommodate for them. This said, the specific risks around the investments being made can factor into the implicit added interest in the leasing costs.
Is there anything that leasing would not cover for a computer or network project?
Leasing companies are open to considering other factors such as labour costs, but will take note of imbalances such as a disproportionate cost ratios between the elements being invested in. This may not exclude you from getting a lease successfully, but may factor into its terms.
What is the general timeframe that companies will be happy to lease IT equipment?
There are no definitive figures, but generally speaking options often range from between 1-5 years.
Will leasing improve our business credit rating?
As long as payments for the lease are made consistently, then yes this can have a positive impact on your business’s credit rating.
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We hope that you found this blog useful for comparing the different options that you have for acquiring hardware for your company.
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