How prevalent is Equipment Leasing in the world of IT? And should you try it?
We had an intern dive into this as a few high level startups are really hawking this model. Here's what he found.
Intro to Equipment Leasing
The vast majority of tech firms provide equipment for employees, but not all companies want the upfront costs associated with buying equipment flat out. As a result, recent years have shown the wider adoption of (and plenty of buzz around) a new service: equipment leasing. IT equipment leasing has become increasingly popular as early stage companies aim to keep their devices up-to-date and accessible to employees, while avoiding the costs of buying and maintaining new hardware. Why pay thousands of dollars upfront when you can spread capex over several years?
Size of Industry
The global IT equipment leasing industry is projected to reach over $4 billion during 2023. Over 5,000 companies offer these leasing services in the United States alone, and many more in similar fields of tech are now attempting to edge their way in.
IT equipment leasing is designed for flexibility of SKU, ranging from vital pieces such as laptops and desktops to more peripheral ones like office tablets and printers. These companies also provide a variety of actual leasing terms, generally starting at month-long plans for the minimum up to a couple of years. Throughout this time, maintenance and repair services are offered, and once a device nears the end of its lifetime, many companies also offer upgrades and replacements options. Leasing typically serves as a financing on-ramp to higher margin services.
No Industry Specificity
Leasing companies are non-industry specific, however, they often lease out devices to businesses in fields like medicine where there is high device turnover, or tech, where companies can be cash strapped and demand flexibility. However, there is no industry where leasing is predominate.
What’s holding it back?
Why aren’t more companies leasing? It makes sense from a CFO's perspective (if not IT's). After all, $4 billion is definitely a respectable cap, but it's nothing compared to that of the IT equipment sales market, which is estimated to hold around a whopping $300 billion market share—over 75 times that of the leasing market!
One of the primary inhibitors is lifecycle cost. Though lowering capex spend looks great to begin with, the cost of leasing a device is actually more expensive in the long run than just paying the device’s cost upfront. Leasing out a $2000 device at $80 per month for 3 years, for example, would actually cost you $2,880 by the end of the term. This is over 44% more expensive to do. Most IT departments take a multi-year hardware lifecycle approach.
2. Inflexible Contracts
Increased costs and a set term length create financial risk. Cancellation language varies, but typically, entering lease contracts means paying for the whole thing. If you lease out a device for 24 months, and you no longer need the device, you typically pay the 24 month term.
3. End of Life
One of the greatest cons of leasing out IT equipment is the lack of resale value at end of term. Buying a device leaves you with many possibilities: selling, redeployment, and even tax deductible-donations once the device becomes outdated. Leasing, though, leaves you with nothing but the need to continue leasing.
Conclusions and Questions...
The emergence of this service is really for three reasons...
IT reseller startups trying to inflate recurring revenue KPIs that appeal to standard VC ARR models. Square peg in a round hole solve, as capturing a large segment of the hardware market would require them to change consumer behavior from purchasing to leasing.
Access to cheap working capital as result of formerly low interest rates allowed resellers to offer competitive pricing on leasing. Now that this tailwind is not the case, will costs increase in the "rent everything" / BNPL world?
The explosion of business creation within the past 10 years has necessitated specialized easy-access IT hardware. The kind of "all-inclusive" leasing option with other services pulled in (procurement, enrollment, deployment) is appealing to rapidly scaling, low-structure teams where IT is run informally. In the long term, can this model grow with its users as they mature?