I am often asked by our clients, is leasing a good option for law firms funding large IT projects? While there is not a “one size fits all” answer to this question, in many instances, leasing can be advantageous. Some benefits that immediately come to mind include:
- Leasing allows the firm to hold onto more free cash. This enables a balanced distribution of profits to partners, while converting larger technology spending into monthly OPEX expenses – which are predictable and closely mirror the monthly billing of today’s cloud providers.
- Another example involves large equipment purchases. Let’s assume that a firm wants to invest in a new fleet of high-end laptops for mobile attorneys. Is paying cash really the best option? While some firms look to their bank or a business line of credit to finance these purchases, this results in paying 100% of the equipment cost, and the firm is ultimately left with outdated hardware only a few years down the road. For companies who tend to upgrade technology on a regular basis, leasing enables full use of the equipment while paying for only 80-85% of the hard costs. This leaves additional cash on hand which may be applied toward implementation services or other pending projects.
- Leasing may also provide significant tax advantages, but these details are better suited for your tax professional and not your IT provider.
In an effort to expand on the benefits of technology leasing, let’s ask the experts. Joining me are two guest bloggers, Christina Floyd and Karen Leastman. Christina and Karen are the VPs of the Legal Division at First American Equipment Finance, a leasing company that has assisted countless law firms make better financial decisions.
- Karen and Christina, are there any other reasons why a firm would consider using a leasing company verses their bank that they have a long-term relationship with?
Hi Chuck! There are many reasons why a law firm would choose a leasing provider over their bank. We understand that most firms have a long-term relationship with their bank, but like you mentioned, leasing is a low-cost solution that allows firms to maintain the latest technology while preserving cash for the firm’s larger initiatives. By choosing the right leasing company, the firm gets the leasing companies expertise in managing refresh programs, including online lease management tools and logistic and data cleansing services.
Technology is a big investment for law firms, which means the firm must either have the capacity to pay cash or be able to take on debt to finance the purchase. However, taking on 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. Even for firms with strong cash flow, a lease structure is most attractive because it aligns the cost of the equipment with its use and evenly distributes the investment per partner per year. With customized lease structures, firms can capitalize on tax advantages, accounting benefits, and spread out the cost of their new technology over several years giving them a convenient monthly payment, which ultimately lowers costs.
- In that case, what can firms finance?
Some of the assets First American finances include: annual subscriptions, accounting software, desktops, laptops, CRM projects, servers, infrastructures, and office equipment and furniture. First American is backed by City National Bank, which allows us to be flexible with our clients and make sure we customize a lease to fit their needs.
- Annual subscriptions? I am seeing a lot of firms change to cloud and software subscriptions, would it be advantageous for firms to finance these subscriptions?
Yes! We have noticed that more and more firms are following the progressive vision and are committed to new technologies such as software subscriptions. Firms can lease yearly subscription charges. Some subscribers offer discounts for annual or multi-year-renewals. We can finance that payment so the firm can take advantage of those savings.
- With the new tax laws recently put in effect, have you seen any impacts on financing within the legal industry?
Under the new tax law firms can expense 100% of the cost in the year they acquire any new or used equipment, which can help lower their taxable net income. A lot of small and mid-size firms are using this as an opportunity to automate and invest in their business whether that means a technology refresh or a data center upgrade. Additionally, firms can take advantage of bonus depreciation and lease the equipment under a $1PO lease. When you finance your equipment this way, the amount you deduct will exceed your cash outlay for the year. The amount you save in taxes can actually exceed the payments, making this a very bottom-line friendly deduction (you are reading this correctly; in many cases, the deduction will actually be profit).
Karen and Christina, thank you for taking the time to join me as guest bloggers! It truly seems that leasing can provide significant benefits for today’s more progressive law firms as they seek alternative methods to fund large-scale projects. Should you be interested in additional information regarding leasing alternatives please feel free to reach out to Karen and Christina at: Karen.Leastman@FAEF.com and Christina.email@example.com.