Deciding On The Length Of Your Lease - International Paper

SPECIAL REPORT
Larry Hunt’s Color Copy News — February 2008
Deciding On The Length Of Your Lease
By Larry Hunt
We’re in a fast changing world, where color copiers are often functionally obsolete in three to four
years. At the same time, a very high percentage of copier leases are set up for five years (60 months).
This is often a very costly mistake. While the correct lease term can depend on many factors, I believe
that most buyers are choosing a payment schedule that is simply too long. In this report, I’ll outline the
costs at various lengths of lease and then discuss the impact that these costs have on your business.
In order to show the impact of stretching out the lease term, the following table shows profit and loss
figures based on a three, four and five year lease term. I’ve modeled this example around one of the
newer and faster color copiers, with a purchase price of about $40,000. I’m using an average of 30,000
copies per month, which is in line with the typical volume for many of these models.
TABLE 1
(Note: All figures are monthly) Costs at Various Lengths of Lease
Length of Lease 3 year 4 year 5 year
Monthly copy volume
COSTS:
30,000 30,000 30,000
Copier lease ($40,000 purchase price) $1,110 $ 930 $ 780
Service and supplies (including paper) at about $.08 ea. 2,400 2,400 2,400
Production labor at about $.07 2,100 2,100 2,100
Overhead (40% of costs) 2,244 2,172 2,112
TOTAL COSTS $7,854 $7,602 $7,392
COST PER COPY $.262 $.253 $.246
I have a number of thoughts that I’d like to share with you regarding Table 1:
1. While most buyers opt for the longer lease term, because the payment is less and therefore easier
to handle, the above table clearly shows that this lower lease payment has very little effect on the
cost to operate a copier department.
2. Based on the cost estimates shown in Table 1, stretching out the lease term, from three to five
years, results in a cost per copy savings of less than $.02. But, even this savings is artificial
since, at the end of three years, the buyer with the five-year lease still has two years of payments
left while the buyer with the three-year lease can walk way after the 36 th . payment.
3. Another problem generated by stretching out the lease term is that the artificial savings, of less
than $.02 per copy, is often passed on to the customer in the form of lower selling prices and not
kept as short term profits.
So, what’s my point? The point is that most companies are fooling themselves by stretching out the
lease term in order to reduce their monthly payment by a few dollars. They end up somewhere in the
middle of a 60-month lease term and then find that they need to upgrade their color copier to keep up
with the competition and provide what their customers want.

At this point, because they might owe $10,000 to $15,000 or more on their current copier, they are at
the mercy of their vendor when trying to upgrade. They are prepared to pay almost any price for the new
equipment in order to be let out of their lease on the obsolete model. In fact, the new lease is often so
confusing that the buyer has no clue as to what price is being paid for the new copier.
Many buyers have told me that the balance owed on the outdated model was being forgiven. But,
when I break down the new lease payment into it’s many possible components (new equipment, old
equipment, service and supplies, personal property tax, insurance, etc.) and then apply a reasonable
lease factor, I invariably find that the amount owed on the outdated copier has been added to the new
lease cost. Even if they technically do not add this cost, they accomplish the same thing by providing a
lower discount on the new copier and using a higher interest rate on the lease.
Summary
Copier technology is advancing faster now than at any time in the 34 years that I’ve been in this
industry. In the 1980s (prior to color copiers) it was common to expect to use a copier for seven to ten
years. The five-year lease period was very acceptable back then. After the equipment was paid off, most
companies could expect another two to five years of use without having to make a lease payment. That
has all changed with the growth in digital copiers, both in B&W and especially in color. And the
connectivity devices are changing even faster than the copiers.
So, what can you do? I believe you have to keep up with new technology if you want to stay in the
copying business. This does not mean that you have to buy every new innovation that comes along. That
job should be left to the pioneers who don’t mind losing money with some of the new and unproven
products. But, you can’t just sit on the sidelines with equipment that is outdated and has a cost structure
that is uncompetitive.
Fortunately, the new equipment tends to carry a lower cost to operate. This can often allow a
company to upgrade at little or no additional cost per copy. But, in order to be in a good position to
upgrade, you need to keep your lease terms at a reasonable length. Today, a reasonable length is
somewhere in the three to four year range. For B&W copiers, I think four years could be justified. For a
color copier, I would strongly urge you to sign no more than a three-year lease. As shown in Table 1, the
cost per copy savings is very little to stretch out a color copier lease to four or five years. I believe the
60-month lease is an outdated form of financing for copier equipment.
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Copyright 2008 by Larry Hunt Publications. No part of this newsletter may be copied or reproduced in any form without the expressed
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