Operations and Management: To Lease or to Buy?

Like consumers shopping for a car, catalogers often debate whether to lease or buy a new piece of equipment for their distribution centers. Sure, you would love to own that whiz-bang gadget that would make your operations run a bit smoother. But can you afford it? Will it be obsolete in two years?

In most cases, says Marietta, GA-based operations expert Debra Wilson Ellis, catalogers will purchase outright new equipment, such as a forklift, that they plan to hold onto for a while. “Most of my clients would use the forklift for 10 or 15 years until it wears out, then they would buy another new forklift,” she says.

Here again, the automobile buy vs. lease metaphor holds. If you typically want a new car every two years, you’re better off leasing. Leasing will cost you less per month, and you’ll have no hassles when it’s time to trade the car in — the leasing company will simply take it back.

But if you typically keep your car until the engine rusts away, you’re better off taking out a three-, four-, or even five-year loan. Once you pay off the loan, you’ll be using the automobile free of charge.

Of course, smaller and newer businesses may not have the luxury of laying out cash for even an essential everyday product. For instance, years ago, when Lake Forest, IL-based The Popcorn Factory was a relatively young company, it leased a shrink-wrapping machine that allowed the gifts cataloger to bind packages together so that it could save on parcel costs. “Of course, they’ve grown, so I doubt that they would lease it now,” Ellis says. (The Popcorn Factory did not return several calls by press time.)

And for equipment that you use only periodically — such as during your busiest six weeks of the year — leasing makes more sense than buying. Privately held Brockton, MA-based Specialty Catalog Corp., whose titles include wigs catalog Paula Young, leases staging equipment, such as scaffolding, twice a year, when the company checks its inventory.

“We use the scaffolding for only four or five days,” says director of distribution Alan Devine. “There’s no sense in using cash to buy it.”

To determine whether it should lease or buy equipment, Philadelphia-based business-to-business cataloger Arbill Glove & Safety Products runs all expenditures through a cost/benefit analysis, says vice president of finance Mike Prushan. Arbill will ask such questions as “How often will the equipment be used?” and “What is the cost of the capital?” — for example, what the interest on a loan would be.

Taxing matters

The tax implications of a lease vs. buy decision are not that complicated because there is little difference between the two. If you purchase the equipment by taking out a loan, you can deduct the cost of the item over a certain number of years, says Jim Adams, managing director of Boston-based investment bank Ulin & Holland. The interest you pay on the loan is also deductible.

If you lease, the payments are deductible for the period during which they were incurred. You may benefit somewhat if you lease the equipment at the beginning of your fiscal year, since you will then get to write off all 12 monthly payments for that year.

If your company is heavily debt-financed, leasing also allows a sort of “off the balance sheet” financing, since it doesn’t add to your debt. Conversely, if you take out a loan to buy the equipment, the loan will show up on the balance sheet as a liability.

Consultant Ellis recommends that you put out request for proposals for any significant purchase or lease. Vendors may be willing to cut deals, especially in these difficult times.

And, of course, always read the fine print before you reach any decision. Arbill’s Prushan points out that one vendor might offer you, say, two years of free maintenance on a forklift as an incentive to buy, while a leasing company might make you pay for an additional maintenance contract.

Did you miss a previous Operations & Management article?

Find it at the Catalog Age Website, at www.CatalogAgemag.com.

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