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Leasing – Spreading the Cost or the Devil’s Work?

By 7th November 2012No Comments

Tim Halfhead

Posted by: Tim Halfhead

You have decided that you need a new piece of hardware. Sometimes it’s a nice to have, sometimes it’s a distress purchase, the photocopier has blown up or the 15 year old PABX has ceased to deliver calls to where it should, parts are unobtainable and the repair guy says that there is nothing else for it but replacement.

The salesman knows his stuff, is absolutely charming and you are convinced that his product meets your need. “Of course, you’ll be leasing it won’t you, keeps it off the balance sheet, can be offset as a business expense and it’s only £x hundred a quarter over x years”.

Bargain!

“Yes” you say, reaching for your pen to sign the Agreement.

You may have made a ghastly error, because you’ve not ASKED THE QUESTION.

Last week, I encountered a lease for a piece of telecomms kit that will cost £37,800 over 7 years. Nothing wrong with that is there? The lease is ”only” £450 a month (plus VAT).

The first thing I did was to check how much the kit would cost if you bought it outright. It was less than £1,750. So, if we ignore inflation, the company is paying almost 22 times the cost of the hardware! That’s some price for spreading the load, keeping it off the balance sheet etc.

The supplier then came back for more, reappearing six months later and selling an additional box which turns out to be completely unnecesssary (the victim sought neither independent technical advice as to whether this was needed nor, again, the market price of the hardware) This time, they went for a 6 year lease (with a different lessor), total cost £4,180 for a useless piece of equipment that can be bought off the shelf for less than £650.

This lease has a special little twist in it. Pretty much all leases require the customer to insure the equipment but this one requires it to be under a policy that has no excess or restrictions. As all policies have some sort of excess or restriction, you, the customer can’t cover the excess yourself, you have to buy special insurance from the leasing company at almost £19 per quarter (so in this case that’s nearly the cost of the box one more time).

Now who is to blame for this rip off?

1. The equipment supplier has misled the customer into thinking that leasing is saving him money and has hugely misrepresented the value of the equipment to the leasing company. The customer never asked!

2. The leasing company hasn’t bothered to do its homework to check the value of what it is that it is providing finance for. Most leasing companies are reputable (though not all) but many are lazy.

3. The customer/victim didn’t ask the right questions or do their homework. Worse, they didn’t use the services of a professional cost and purchase management consultant. We would have guided them through the technical, contractual and financial minefields and, I have no doubt in this case, saved tens of thousands.

Leasing can be a really effective way of financing hardware. When it’s done right!