Leasing vs. buying storage: A closer look

What you will learn from this tip: To help you decide between leasing and buying storage, this tip looks at the pros and cons of each approach along with some situational considerations.

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The fundamental difference between purchasing and leasing storage is that with a purchase, you pay or finance the acquisition in exchange for ownership and equity of the asset. On the other hand, a lease or rental involves periodic payment by a lessee to a lessor in exchange for use of an asset, with the lessor retaining ownership and equity of the asset.

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Leasing and financing situations share some common benefits including shifting or deferring costs over a period time for lower monthly payments to ease cash flow. At times, a lease may not be cheaper from a total cost of ownership (TCO) perspective, and you would need to do a financial lease vs. buy analysis. Traditionally, leases have been sold as a means to afford expensive items, maximize cash flow, insulate yourself from technology obsolesce and relieve yourself of the burden of technology disposal. Even though cost per megabyte continues to fall, leasing has been touted as a way to cope with a flat budget to meet increasing IT and storage demands. Leases are an alternative to using cash or bank credit lines to maintain or improve financial stability of your business. There can be different financial and tax benefits or caveats for leases, so you should seek professional advice (tax, accounting, insurance and/or legal) for your situation.

A lease vs. purchase (or finance) decision hinges in part on your financial situation and business requirements. Other factors include personal and organization preferences, current market opportunities and economic conditions. How long you will be able to (and plan on) effectively using an asset also plays into the decision. Generally speaking, the longer you plan on using an item, the more sense it may make to make a purchase (outright or via financing). With a purchase, you own the asset and the equity in it; however, you also have a larger cash outlay or finance fees. An outright purchase can also put a strain on your cash flow and balance sheet. Situations and conditions change from an economic and technology standpoint over time, so it makes sense to revisit lease vs. purchase decisions periodically.

Fair market value (FMV) leases can be a good option if you plan on replacing your technology in three years or less and may have tax benefits depending on your business' location. A FMV lease generally involves returning the asset to the lessor at the end of the lease term or purchasing the item at fair market value. Another option is a dollar purchase for technology that you wish to keep for a long period of time with ownership transferring to you -- the lessee -- at the end of the lease term. A FMV could have a lower monthly premium than a dollar purchase option scenario; however, you should shop around to see how terms and rates differ. Most major technology vendors have finance divisions or subsidiaries that can provide financing and lease options. In addition to major technology vendors, most value added resellers (VARs), integrators and resellers typically have some type of lease arrangement with a finance firm. Some finance firms are also VARs or resellers providing cradle-to-grave asset and technology lifecycle solutions. Some firms provide broad finance options while others in specific technologies or areas of focus. For example, General Electric Company (GE) has a finance division that deals with technology ranging from IT equipment to Boeing 747 jumbo jet freighters. Some firms further specialize, for example, in hardware- or software-only leases and financing.

Some firms further specialize, for example, in hardware- or software-only leases and financing.

Some general things to consider when making a lease vs. purchase decision include:

What are the current market finance (interest) rates?

Do you have cash reserve and cash flow to support a purchase?

How long will you be using or have a need for the technology?

Can the service life of the technology be extended in a cost-effective manor?

What are your options to renew or extend a lease when it expires?

How much software and or services can be included in a lease agreement?

What are the federal and state regulations pertaining to asset disposal?

To summarize, you should look at a lease vs. buy decision from a technology and business (finance, tax, insurance, etc.) perspective and balance the pros and cons to meet your particular needs. Revisit your purchase vs. lease polices from time to time to see if current economic, business, technology and other influences warrant a shift in your purchase vs. lease decisions.

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About the author: Greg Schulz is founder and senior analyst with the IT infrastructure analyst and consulting firm StorageIO. Greg is also the author and illustrator of "Resilient Storage Networks" (Elsevier) and has contributed material to "Storage" magazine and other TechTarget venues.

26 May 2006