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Leasing vs. Purchasing - Objections and Responses

Many IT managers, the clients you deal with on a daily basis, still don't fully appreciate all the financial benefits of leasing.

When you discuss financing options with your clients, it's natural that those who are new to leasing their IT will be reluctant to change their ways. But understanding their concerns and helping them overcome their objections can help them take advantage of all the benefits of leasing. And that can offer you many benefits, as well.

The following are common objections to leasing you may hear from your clients, and information that can help you respond effectively.

Why do you want to purchase instead of lease?

Client answer:
"Our organization has a 'purchase only' policy."

Your response:
"Let's look more closely at your 'policy'."
This is frequently the first reaction you'll hear from financing-averse clients. In fact, such "purchase only policies" rarely, if ever, exist. It's much more likely that the client purchases equipment out of habit, rather than because of an actual, written policy. And once you explain how financing works, and they understand how beneficial leasing their next IT acquisition can be, that "policy" can be quickly forgotten.
Client answer:
"We've got cash, and cash is free."

Your response:
"Cash isn't free and it's a limited asset."
The prospect of avoiding interest and financing charges by paying cash is pretty attractive to some clients. But cash isn't free. It's a limited asset, and there may be better ways to use it than tying it up in a depreciating asset like IT. Keeping cash on hand makes it easier to seize a business opportunity before your competitor can arrange financing, or to weather a downturn that cripples your competition. By spending cash on IT, the client can also lose the tax advantages and residual-value benefits that leasing provides. (The residual value is the amount that the lessor can expect to recover by selling the asset after the lease ends.) Ultimately, using cash to invest in their business provides returns that are far higher than the interest rate of a lease.
Client answer:
"We keep our assets for at least four years, so owning is cheaper than leasing."

Your response:
"Owning ties up cash and may still be more expensive."
Your client may do a net present-value comparison between lease and purchase, and conclude than owning is cheaper. But as we showed above, the cost of cash is usually higher than the debt rate. Cash is a scarce asset on the balance sheet, and a reasonable position is to use the Weighted Average Cost of Capital as the discount factor. Even if the client believes today that the equipment will be kept for a long time, a lot of things can change. A 36-month fair market value (FMV) lease preserves substantial future flexibility at little or no additional cost.

How will you finance your purchase?

Client answer:
"We'll just finance it with short-term credit."

Your response:
"Leasing can be more cost effective than short-term credit."
Short-term credit is an important resource to financial managers. But even when rates are comparatively low, and particularly in a challenging economic environment when short-term credit is often hard to come by, it makes more sense to use an external, cost-effective source of financing for IT investments, and to preserve short-term credit for other core investments.
A fixed-rate lease ensures a regular, low monthly payment that's easy to budget for. It reduces the total cost of ownership, since the lease payment reflects the residual value. It also eliminates end-of-lease disposal issues. And a hardware lease helps your client meet changing capacity requirements by letting them add or upgrade systems at any time during the lease term. Short-term credit offers none of these advantages.
Client answer:
"We have a good line of credit at our bank."

Your response:
"A line of credit is limited and often has significant additional costs associated with it."
A line of credit typically has to be secured by USD5 to USD10 of high-quality assets for every USD1 borrowed, which makes it a limited resource that should be kept in reserve for items that cannot be financed any other way. Lines of credit are also usually short-term funded, so there is a substantial risk of interest rates going up over time. But IBM Global Financing's leasing rates are fixed over the entire leasing period, which makes forecasting and budgeting much easier. Finally, lines of credit often require the client to pay additional fees or incur additional costs, such as reporting inventory or AR levels.
Client answer:
"We'll just get a term loan."

Your response:
"Term loans often have terms and conditions that can add additional costs and complexity."
If the client is considering a term loan, they should carefully consider all of the terms and conditions that may come with it. There are usually fees involved, and the client may be asked to make a down payment or to keep compensating balances. These are all additional expenses that a lease will not incur.
When compared to obtaining financing through a bank or other financial organization, remember the added value that IBM Global Financing brings as the world's leading provider of IT financing. We're experts not only in financing, but in technology as well. Leasing with IBM Global Financing will help your clients keep up with technology by letting them replace or upgrade equipment either mid-term or at end of lease. We can take an aggressive residual-value position on equipment from IBM and many other vendors, and provide the client with fair market value on mid-term exchanges. And as a total IT financing solution provider, IBM Global Financing can structure a lease that rolls hardware, software and services into a single contract with a single periodic invoice, simplifying budgeting.

What will you do with the equipment at the end of its life?

Client answer:
"We'll just cascade it down to other users. Or sell it. Or something."

Your response:
"Equipment disposal typically involves unexpected costs and environmental restrictions."
When planning a new IT acquisition, it's natural that the last thing on a client's mind is how they're going to dispose of the equipment a few years down the road. But it's a hidden cost that needs to be considered when choosing between purchasing and leasing. Will your clients end up putting retired systems into storage indefinitely? Or trying to sell them for pennies on the dollar (or even less)? Or dealing with the cost and environmental regulations involved with dumping them?
When your clients lease their IT equipment with IBM Global Financing, all those issues are eliminated. At the end of the lease, the client can simply return the equipment to us, and we'll take care of all aspects of equipment disposal, relieving them of any additional cost or legal liability. Then they're free to move on to the latest technologies on the market.
Of course, if the client decides that they are still happy with the equipment, they have the option of extending the lease on a monthly basis for the same low payment, or negotiating a new contract. The choice is entirely theirs.

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