Gaining from leasing PCs

SMART BUSINESS

I need a cup of tea every morning. But I won't buy a tea estate for that." When Habeeb Thangal, a young entrepreneur who runs a telecommunication solutions start-up that employs around 65 people says this, he makes sense.

"This is my guiding principle when it comes to automating my office. I don't invest my capital in acquiring computers, software and peripherals. I lease them. The lessor installs the computers and provides all peripherals. In case of a system crash, help is just a phone call away," says Thangal, whose CTL Systems has offices at Currey Road in Mumbai and Thrissur, Kerala.

"Leasing PCs allows me conserve capital. I can employ my working capital in other avenues which will generate more profits," he said.

"Besides the high up-front payments I have to make for buying PCs, software and peripherals, I will have to appoint an engineer to run the system. All this would mean diversion of cash to areas other than my core business. Assigning the information technology needs to a rental company frees my time and funds," he said.

Thangal's words find an echo at the other end of the corporate spectrum.

"Sourcing, not buying, PCs is our global policy. In India also we take PCs on rent for our offices. It is more profitable and protects us from the risk of technology obsolescence," said Nikhil Khush, sourcing in-charge of E I DuPont India Pvt Ltd, a subsidiary of E I du Pont de Nemours and Company, the US chemicals giant.

"Taking PCs on rent will be a revenue expenditure for us. It is not a capital expenditure. This allows better cash management and expansion without affecting the existing financing pattern," he said.

"The technology in the IT sector is rapidly changing. The lease term will be shorter than the depreciable life of the computer. At the end of the contract, the company can return the equipment to the lessor and opt for the most modern equipment available. But when you buy computers making a hefty capital investment, after some time you find your money locked in while your system becomes technologically obsolete," Khush said.

Says Thangal, "When computers were new in the market, I bought a 486 system for Rs 35,000. Technology changed at the speed of light and I had to sell my computer to the scrap dealer. I cannot allow this to happen in my company. I take high-end computer systems on lease and when technology changes, I ask for upgrades. The lessor comes here, takes back his old unit and upgrades my portfolio with the most productive technology in the market," he said. "And we do not lose anything either in the deal," says C Rajesh, the managing partner of a-dot computers in Mumbai, which leases computers.

"Even if a PC ceases to be of any value to one company, some other enterprise with less technologically intensive needs will find it useful. We take back the PCs which one company feels are obsolete and sell or rent them out to another company that might find it useful. This deal is beneficial to us and both the companies," he said.

A White Paper prepared by IBM Global Financing, a provider of IT financing services, says companies in today's challenging times can use leasing to manage short- and long-term cash management systems.

"For any company, maintaining older machines and technologies is costly. If a computer is junked, it is a direct loss on your capital as the equipment's life time is over. Leave alone the space it occupies and renders useless. Leasing will eliminate this book loss," Rajesh said.

Says Naveen Raj Nirban, the proprietor of Sree Krishna Computers, Chembur, Mumbai: "We often insist on a security deposit before installing the system in the lessee's office. The deposit will be proportionate to the number of computers and other accessories given on rent. There have been instances where the renting company did not get the rent as well as the rented PC."

"Students who need a PC for a project of short duration and small companies which require the equipment to make a presentation depend on PC renting firms. A Pentium III-based PC will fetch a rent of Rs 1,800 a month," said D Sudhakar of HL Computers.

"We provide only the basic software. The lessee can add more software at his own expense," he said.

The PC renting companies in the unorganised sector in India do not take any responsibility for the physical damage of the equipment at the lessee's end. And the concept of insuring the system is yet to gain popularity.

"If you look at it from a different angle, renting a PC is like taking a loan. The organisations use a loan to generate profits that annuls the effect of the interest paid on it. A rented IT system will help a company generate more business without denting its capital," Rajesh said.

Many companies structure the leasing terms in such a way that it helps them claim 100 per cent tax deduction. Proper structuring of the lease makes the accounting treatment more flexible. When it comes to renting a PC, the companies can eat the cake and have it too, say lessors.