We thank our partners at First American for this special contribution to our blog.
By Christina Floyd, First American Equipment Finance
Technology changes at an insanely fast pace, and many law firms struggle to stay on top of it all. Choosing the right level of technology investment is a persistent challenge with far-reaching implications – impacting not only the firm’s budget and cash flow, but also staff productivity and overall competitiveness.
Unfortunately, it’s far too easy to either over- or under-invest in technology. Finding room in the budget for large IT purchases can be difficult, but holding on to older technology that slows down staff and drains resources with maintenance and upkeep is no better.
A lease-based technology refresh program may be just the answer.
Solving the challenge of obsolescence
With an IT refresh program, the firm leases technology rather than directly purchases it. The lease can cover both hardware (such as computers, servers and network equipment) and software (including SaaS subscriptions and system configuration, customization and consulting services). The lease renews at a specified time frame – usually three to five years – at which point, the firm refreshes their technology and a new program begins.
This lease-based approach ensures the firm’s technology is always current and always at the right level of investment for their business. It is often a smarter strategy than outright purchasing expensive hardware and software that will become obsolete within a few years.
Managing budgets, balance sheets and cash flow
Indeed, technology is typically costly to own. After all, the investment must be paid for, which means the firm must either have the capacity to pay cash or must be able to take on debt to finance the purchase. However, taking on more debt can tie up the firm’s bank line of credit or access to working capital – a tradeoff not every firm is willing to take.
Equipment lease payments, on the other hand, are an operating expense, not a debt liability. Because the firm does not actually own the equipment, the assets do not appear on the firm’s balance sheet. As a result, there is no impact to the firm’s existing debt covenants with their bank. Even with the new lease accounting changes forthcoming in 2019, leases will be categorized as non-debt – meaning no impact on these covenants.
Moreover, the monthly lease payments are steady and predictable, eliminating the need for occasional but often massive spikes in capital investments that can wreak havoc on budgets and planning. This predictability can be particularly advantageous during financially challenging periods, such as times of rapid growth or economic recessions.
There is also a maintenance cost to owning technology. Older equipment tends to need increasing levels of support to manage security patches, updates and ongoing repairs as the technology ages. Once the warranty period has passed, maintenance expenses for the average law firm can become substantial.
With leasing, the lease firm can help manage any warranty repairs that may be needed, not the firm. Because the equipment is typically refreshed before the warranty expires, out-of-pocket maintenance costs are all but eliminated.
Evaluating lease options
Many equipment vendors offer equipment leasing as a finance option. This is often an easy route for firms that have already decided on a specific vendor. However, firms with more complex tech needs may need to source equipment from multiple vendors, and managing multiple vendor-specific lease programs may become an administrative burden. Additionally, at renewal time, firms may find themselves at a disadvantage if they want to switch vendors.
Some larger banks also offer equipment lease finance services, which can be convenient for firms that have good relationships with their bank and would like to streamline their financial dealings through a single entity. There are also a handful of independent equipment lease finance companies, which may have varying degrees of experience with different technology vendors and the unique needs of law firms.
Ultimately, most firms will find the best results with a lease partner that is able to work with multiple vendors, experienced enough to provide smart insights into how best to serve law firms, and that provides a smooth, hassle-free asset return process at the end of the lease.
Technology is an important part of any growing business, so treat it as a strategic asset, not a lost capital expense. The right perspective — and the right financial approach — can help firms keep their competitive edge and stay on their clients’ winning side.
For more information on lease-based IT refresh programs, please visit First American Equipment Finance at www.faef.com/legal or contact Innovative below.