Let's be honest: hardware can be an expensive investment, particularly if you want to furnish an entire office with devices.
In these cases, you often have three choices to acquire hardware:
- You can purchase the hardware outright.
- You can lease the hardware, paying it off over time.
- You can hire an IT provider who offers "hardware-as-a-service."
Each option has its pros and cons. Of course, your company's financial situation will help determine which option you select. Always consult your accounting or financial advisor before making a significant company purchase.
However, your choice can be narrowed down to a simple question: "Do I want to own my hardware?"
For over 25 years, WEBIT Services has helped hundreds of satisfied clients develop effective IT strategies and find technology to meet their needs.
By reading this article, you will learn the pros and cons of each method of acquiring hardware.
Buying your hardware
If you're having a good year financially, you might consider buying your hardware.
In this circumstance, you would speak to your IT provider or internal IT team about new hardware, and they would match you with technology within your budget that will meet your needs and grow with your company over the next five years.
Advantages of buying hardware
1. You own your hardware
When you buy the hardware, it is 100% your asset. You control everything about the hardware, and it does not tie you to a single IT provider or leasing company.
2. You can use IRS Section 179 for a tax deduction
IRS Section 179 allows you to deduct the total cost of newly purchased or leased company assets from that year's taxes.
Disadvantages of buying hardware
1. Hardware will need replacing in 5-7 years.
Generally, hardware like computers will reach End of Life or End of Service within five years. After this point, its value depreciates drastically, and risk increases. The lifespan of your technology is managed through IT asset lifecycle management and your IT roadmap.
The lifespan of IT hardware is the same regardless of purchasing, leasing, or renting your hardware. You will need to replace or plan to replace hardware around the five-year mark, no matter how you acquire it.
2. It's expensive
Buying your hardware outright can be a sizeable investment, particularly if you are replacing an entire office's worth of technology.
This kind of purchase requires the following:
- Significant budgeting and planning before purchasing.
- A profitable year.
- Readily accessible funds.
Leasing your hardware
Leasing is the middle-ground option between buying your hardware or renting it as hardware-as-a-service.
When you lease a computer, you make an initial down payment and then pay the leasing company for an agreed time frame. Because this is a loan, you will also pay a set interest rate until the hardware is paid off.
Once the loan and interest are paid off, you can make a final buyout payment, and the hardware is yours.
Advantages of leasing hardware
1. An option to eventually own your hardware without paying everything upfront
Leasing is an excellent option if you don't have the funds to buy your hardware outright. You make payments gradually over time, and, in the end, you still get to own your hardware.
2. You can use IRS Section 179 for leased hardware
You can file leased equipment under Section 179 for a tax deduction like purchased hardware.
3. Some IT providers will allow you to include the IT project payments in the hardware lease agreement
Replacing an office's hardware takes time, expertise, and resources. As such, IT providers will charge an IT project fee to remove, program, and install hardware.
Instead of paying the IT provider separately, some providers will let you roll the IT project's cost into your hardware lease. This allows you to break down the project's cost into manageable payments over time.
Of course, this advantage will only apply to certain providers. Talk to your provider first to see if this is an option. Otherwise, you will pay the IT project fee separately from your hardware lease.
Disadvantages of leasing hardware
1. Interest fees mean the hardware costs more over time
Due to the nature of loans, interest fees increase the cost of your hardware over time. You will pay more by leasing your hardware than by purchasing it.
Be aware of your interest rate before agreeing to a lease. If the interest rate is too high, you will pay more than the hardware is worth.
2. Paying more than five years will cost you more than the hardware is worth
Because hardware needs replacing roughly every five years, you don't want to be making payments on it past that point. By the time five years have passed, the hardware has depreciated significantly.
3. Buyout payments can be tricky
Before agreeing to a lease, verify your buyout payment options.
Some leasing companies will offer a one-dollar buyout. Essentially, make all your agreed payments, and you can then own your equipment for one more dollar. This is the ideal lease buyout arrangement.
However, some companies will instead list the buyout as "market value." This may mean a buyout of hundreds of dollars per device.
4. Leasing is often only an option for investments of $10,000 or more
Leasing is not an option for small projects or individual hardware replacements. If you want to lease hardware, it needs to be a significant project and investment.
For the most part, leasing companies are uninterested in a leasing agreement for less than $10,000.
Some IT providers will offer hardware-as-a-service. You pay the provider a reoccurring monthly or annual fee to use its hardware. In exchange, the provider equips your business with all the necessary hardware.
This is more like a subscription service than a lease. The IT provider owns the hardware, and you pay a subscription to use it.
Advantages of hardware-as-a-service
1. The IT provider is entirely responsible for the hardware.
If you subscribe to hardware-as-a-service, your IT provider ensures the hardware is functional, maintained, and replaced when deemed End of Life. This is because the IT provider owns the hardware.
2. A viable option for those who do not want to own their hardware
If your company cannot afford or would rather not own hardware, renting your technology through your provider is a viable option.
This may be the case for young businesses or start-ups who may not have the funds to purchase or lease their equipment.
Disadvantages of hardware-as-a-service
1. It makes IT providers "sticky"
Hardware-as-a-service makes it very difficult to part ways with your particular provider because they own all of your hardware.
They may only offer very high buyout options or may not offer buyouts at all.
In the case of the latter, canceling your contract may result in losing your equipment. Of course, this may be tricky legally and practically. Either way, you may pay a significant buyout fee, legal fees, or new hardware altogether.
In other situations, you may only part ways once the current contract and payment cycle have concluded.
Because clients don't want to lose their hardware, they may feel trapped in a poor IT partnership when using hardware-as-a-service
2. You do not own your hardware
In hardware-as-a-service, you are entirely reliant on your IT provider for hardware. You do not own it, and you cannot change providers without potentially losing your current hardware or making a significant buyout payment.
Next steps for acquiring new hardware
Acquiring hardware is a significant but necessary investment for businesses, and users can choose one of three ways to gain access to new hardware.
If a company has had a year of significant profit, they might consider buying their hardware. However, purchasing hardware is not an option if the funds are not readily available.
If a payment plan is more digestible for your company, then leasing hardware is a great option. However, verify the buyout fee, interest rate, and lease length before agreeing to a lease.
Both buying and leasing equipment can qualify for a Section 179 tax deduction.
If you do not wish to own your hardware, you might rent hardware from your provider through a hardware-as-a-service agreement. In this case, closely examine your contract to see what happens if you change providers. You don't want the existing provider to remove your equipment in a contract termination.
Talk to your IT provider about hardware options, asset lifecycle management, and your IT roadmap. Your IT roadmap will outline when hardware should be replaced and your company's growth goals.
You should also consult your CPA, CFO, or accounting expert before making a significant investment, like a large hardware purchase. They will verify what you can afford.
WEBIT Services specializes in IT strategy. In the past 25 years, it has helped hundreds of clients plan for IT purchases, updates, and installations.
If you are currently in need of an IT provider, schedule a free 30-minute consultation with WEBIT Services to see if we can help.
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