The Differences Between Purchasing and Leasing

When you purchase a copier outright one of the benefits is that you have one less monthly invoice and monthly payment to process. When leasing a copier you will have to process and pay a monthly lease invoice each month.

When purchasing a copier you don’t have to pay the additional finance charges that are required when you lease the copier.

In many circumstances a company can write off the entire purchase cost of a business copier in the year that it was purchased without having to depreciate it over the five- year depreciation schedule. Please consult with your CPA or tax professional regarding the viability of this option for your specific company.

Many companies are unaware that at the end of the lease term they are responsible to pay for the shipment of the copier back to the lease company that routinely can cost $400.00 to $800.00 or more. When purchasing a copier, of course, you eliminate that recurring cost. (Further in this guide you will find details on the requirement to ship back copiers at the end of a lease term. This is an important consideration when considering whether a lease or purchase is the right choice for you.)

When you purchase the copier you own it for the entire useful life of the equipment. When leasing a copier, however, you will typically upgrade to a new copier at the end of the lease term. Not only do you lose the residual value of the copier, but – as noted previously – you have to pay to ship it back to the lease company. 

Many experts suggest that leasing provides you with the flexibility to easily upgrade to a newer or higher-end machine. These same experts suggest that this is not an option when purchasing a  copier.  The opposite is actually true. When you own a copier you have the flexibility to trade in your existing copier and use the trade-in value to offset the cost of a new machine. When leasing, however, there is always a significant penalty for early buyout or early termination. In addition, upgrading to a new or different machine prior to the scheduled end of the lease term means you have to satisfy the buyout first. The summary of this information is that when you own your copier, you always have the flexibility to make a change any time you want and when you lease a copier you have constraints and the potential for financial penalty should you wish to upgrade in the midst of an existing lease term.

When purchasing a copier you can continue to use the copier as it is functioning and meets your needs. Many companies use purchased copiers for six or seven years or longer (the average lifespan of a copier that is purchased is 72 months.) Most copier leases, on the other hand, are for either 36 or 60 months. In the vast majority of cases companies simply roll from one lease to the next lease. Consequently, they are always paying the full cost plus finance charges for a new copier every three or five years. In fact, as outlined above, the average leased copier has a total lifespan of just 42 months.

When comparing the benefits and downsides of either purchasing or leasing a copier, the single biggest factor is often cash flow. Will your company benefit more by retaining its current cash flow by choosing a “zero out-of-pocket lease”, or would you benefit more by purchasing the copier and avoiding the finance charges, the shorter lifespan of the equipment and the burden of one more monthly payment to manage each month?

In every small business office, printers and copiers are virtually standard equipment. A stand-alone business copy machine is a regular fixture and probably one of the most frequently used machines. But copiers wear out or no longer meet the growing demands of a business and must be replaced. So, again the question: Do you buy one outright, or opt for a lease?

All things considered, most small businesses would be hard-pressed to purchase a new copier. The average cost of a commercial color copy system is $6,300.00 whereas the average lease payment for that same copier on a 60 month lease is just $120.00. Retaining the valuable commodity of cash on hand is the primary reason that nearly 85% of commercial business copiers are leased. 

The average copier that is purchased yields a usable lifespan 54% longer than the average lifespan of a copier that is leased. This means companies that lease are paying more for the use of a copier in their businesses in the overwhelming percentage of cases. An important statistic in support of this claim is the average purchased copier has a usable lifespan of 78 months whereas the average lifespan of a leased copier is just 42 months. In examining this further we learn that over 90% of all leases are upgraded at the end of the lease term regardless of the length of term and regardless of the condition of the equipment at the end of term. The overwhelming majority of copier leases come with either a 36 month lease term or a 60 month lease term and 90% of these leases are upgraded at or before the scheduled end of term. 

What does all this mean? When it’s all said and done, the average lifespan of a copier lease is just 42 months. A very important note from the author is that most companies would benefit from a 60 month lease term compared to a 36 month lease term because we’d expect any copier to perform well for at least 60 months and there is no compelling reason to upgrade after just 36 months. Statistically, over 90% of leases are upgraded at the end of term regardless of whether that term is 36 or 60 months. Therefore, companies that lease for 36 months are paying 40% more for use of their copiers than companies with a 60 month copier lease and companies leasing for 36 months are paying over twice as much as the average company that purchases a copier!

In summary, companies that lease, pay for a new copier every 42 months on average whereas the average useful life of copies that are purchased is 78 months. A longer product lifespan can be interpreted as good or bad depending on each company’s situation; 

The upside to getting a new copier every 42 months is that you’re consistently working with newer, more reliable equipment which can yield greater productivity, less downtime for service and less compatibility challenges than one would expect with older equipment. The downside to getting a new copier every 42 months is that you’re paying more money for the use of copier over the course of time. No matter how we spin it, paying for a new machine every 42 months is more costly than paying for a new copier every 78 months. It’s up to each company to weigh the value of cost vs. more frequent updates to newer technology. 

There are essentially two options available when leasing copiers:  A $1.00 buyout option lease also known as a capital lease or a Fair Market Value lease also known as an operating lease.

A  capital lease with a  $1.00  end of lease buyout option is treated much like a loan with the equipment accounted as an asset on your balance sheet. This means that you benefit from tax depreciation and other similar benefits. One of the downsides of this type of lease is the time length of the contract – sometimes up to five years. You could find yourself still paying for an out-of-date machine long before your contract ends.

Operating leases with a Fair Market Value Buyout are more common with businesses. One advantage is Fair Market Value Copier Leases offer a lower monthly payment when compared to leases with a $1.00 buyout option. When you consider that approximately 90% of leases are upgraded at or before the end of term regardless of which buyout option you choose, it doesn’t make sense to have a higher monthly payment based on the buyout option that is rarely exercised.

This can be somewhat confusing for business owners who want to lease and are considering an option to buy the copier eventually. Typically, the choice is either a fair market value (FMV option) or a $1 buyout option.

Fair market value (FMV) simply means that the equipment can be purchased at the end of the lease for the established fair market value.

That amount could be hundreds of dollars or more but as a rule of thumb, the fair market value of a machine at the end of the lease will equate to somewhere between 10% – 15% of the original principal value of the machine. Your copier account representative should be able to tell you the principal value of the machine prior to signing a lease agreement.

The $1 buyout option essentially means the copier can be purchased for one dollar at the end of the lease. To most, this would appear to be the preferred option. However, be aware that the monthly payments on FMV leases are approximately 15% lower than those with a $1.00 buyout option.

Since the majority of companies will want to upgrade to a new machine at or before the end of term regardless of the buyout option chosen, in most cases it makes sense to opt for an FMV lease with the lower monthly payment. In the event you do want to purchase the copier at the end of an FMV lease it is likely that the Fair Market Value buyout will be less than the 15% higher costs you would have incurred during the life of a lease with a $1.00 buyout option.

Lessee is required to pay to ship the copier back to the lease company at the conclusion of the lease

In the event that the lessee chooses to terminate the lease agreement, the lessee will be required to arrange and pay for shipping the copier to the destination of the lease company’s choice anywhere in the United States. Shipping a copier can be extremely expensive especially if the destination is out of state. Lease companies provide a list of preferred shipping companies, who will usually charge a premium rate to handle the shipping on the lessee’s behalf however the lessee is not required to use the lease company’s preferred shipper. Often, the lessee can make their own shipping arrangements at a cost significantly lower than that charged by the lease company’s preferred vendors. And if the lessee has arranged to lease or purchase a new copier, the lessee can often negotiate to have the vendor of the new equipment take on the shipping costs as an incentive to selling the new copier. 

Copier lease agreements have a clause that states the lessee will be charged a lease initiation fee for the setup of the lease agreement

The lease initiation fee is a one-time, non-negotiable charge that will be itemized separately on the first monthly lease statement. Generally, the lease initiation fee will range from $70.00 to $135.00. Many lessees are caught off guard when they see this charge on their initial invoice.

Lessee is required to insure the copier they are leasing

When leasing a copier the lessee is required to add the lease company to their existing general liability insurance as the sole loss payee for the value of the copier. Otherwise, the lessee can be charged an insurance surcharge that is generally 6-8% of the monthly lease payment.

In most cases, the lessee’s insurance agent will mail the certificate directly to the lease company on behalf of the lessee. The potential issue is that many lessees either don’t have business insurance, or are not aware that they are required to provide their own insurance, and often end of paying a significant monthly insurance surcharge without it ever coming to their attention.