FAQs - the fundamentals of renting
Find Out Why Renting Can Be So Much More Cost-Effective Than Buying
There are plenty of good reasons why renting IT makes great business sense for virtually any business. Below are some of the most frequently asked questions we get from clients who want to get a better understanding of the most significant advantages of renting.
“We have the cash. And cash is free. So why rent?”
The prospect of avoiding interest and financing charges by paying cash is pretty attractive to some companies. 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. Because, face it, in two years your IT resources will be relatively small. The rate at which technology depreciates is incredible.
Keeping cash at hand makes it much easier to seize a business opportunity before a competitor can arrange financing, or to weather a downturn that cripples your competition. By spending cash on IT, a business can also loose the tax advantages and residual value benefits provided by renting. The residual value is the amount that the rentor can expect to recover by selling the asset after the rental agreement ends. Ultimately, using cash to invest in your business provides returns that are far higher than the interest rate of a rental. It is very clear that renting is the best choice, yet some people are still reluctant to choose it.
“We keep our assets for at least four years, so isn’t owning cheaper than renting?”
A business may do a net present-value comparison between rental and purchase, and conclude that 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 a business 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) rental preserves substantial future flexibility at little to no additional cost.
“Why don’t we just finance it with 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, more cost-effective source of financing for IT investments, and to preserve short-term credit for other core investments.
Unlike short-term credit, a fixed-rate rental 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-rental disposal issues. And a hardware rental helps your customers meet changing capacity requirements by letting them add or upgrade systems at any time, during the rental term. This is what rental can do for your business, while short-term credit offers none of these advantages.
“What if we have a good line of credit at our bank?”
A line of credit typically has to be secured by R 5 to R 10 of high-quality assets for every R 1 borrowed. This makes it quite a limited resource that should be kept in reserve for items that cannot be financed in any other way. The line of credit should be the last resort, in case nothing else works.
Lines of credit are also usually short-term funded, so there is a substantial risk of interest rates going up over time. On the other hand, rental rates can be fixed over the entire rental period, making forecasting and budgeting much easier.
Finally, lines of credit often require a company to pay additional fees, or incur additional costs. These costs can be reporting inventory or AR levels.
“Why not just get a term loan?”
If a company is considering a term loan, they should carefully consider all of the terms and conditions that might come with it. There are usually some fees involved, and the company 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 Spartan brings as a leading provider of IT financing. Due to our experience and education, we are experts not only in financing, but in technology as well. Renting with Spartan will help companies keep up with technology by allowing them to replace or upgrade equipment – either mid-term or at the end of rental. We can take an aggressive residual-value position on equipment from many vendors, and provide the customer with fair market value on mid-term exchanges. And as a total IT financing solution provider, Spartan can structure a rental that rolls hardware, software and services into a single contract with a single periodic invoice. This leads to a simplified budgeting process – the dream of any business owner!
“Why not just cascade it down to other users or sell it ourselves?”
When planning a new IT acquisition, it is natural that the last thing on a person’s mind is how he/she is going to dispose of the equipment after a few years. But it is a hidden cost that needs to be considered when it comes to choosing between purchasing and renting.
Will the company end up putting retired systems into storage indefinitely? Or trying to sell them for cents on the Rand (or even less)? Or, perhaps, deal with the costs and environmental regulations implied by dumping?
When companies rent their IT equipment with Spartan, all those issues are eliminated. It’s like they never existed! At the end of the rental, the customer can simply return the equipment to us, and we’ll take care of all aspects of equipment disposal. We relieve our customers of any additional costs or legal liabilities. They are free to move on to the latest technologies on the market.
Of course, if the customer decides that they are still happy with the equipment, they have the option of extending the rental on a monthly basis for the same low payment, or negotiating a new contract. The choice is entirely up to them. We are just here to help, not force!
