You're ready to replace that aging 66-megahertz 486 system that once seemed so fast. How do you pay for it?
Many considerations enter into how you'll answer that question. First, you need to decide just how much of a computer you really need. The under-$1,000 PC market offers a noteworthy selection, and you may find that one of these systems will serve you well.
Still, you get what you pay for. There are reasons these systems are relatively cheap--their slower processors, skimpier memory, smaller hard disks and lack of expandability, to name a few.
If you want the whole enchilada in your next PC, you'll probably spend somewhere around $2,500. That's just for the computer and monitor.
Whether you buy a low-end machine or aim high, you have three payment options: cash, revolving-type credit or leasing.
If you plan to spend under $1,000, you should save until you have the cash to buy it outright. If you must use your credit card, try to pay off the balance over a few months. You might also check with your bank about a loan. Often, banks offer lower-interest rates than credit cards.
Other considerations arise when your expenditure gets up into the thousands of dollars. Even if you have the cash, do you really want to tie your money up in a piece of equipment whose value will be cut in half the moment you carry it out of the computer store?
You might also want to take into account the tax implications of a big purchase. (I can't stress enough how important it is to consult with your accountant or professional tax preparer.)
Typically, equipment that you purchase for business purposes must be depreciated over at least five years.
However, each year, you can write off the full purchase amount, up to a certain dollar limit, of your equipment purchases. If you sell that equipment before its normal five-year depreciation period, however, you could be in for some additional tax consequences.
That brings me to equipment leasing, which creates an entirely different tax situation. Just like leasing a car, leasing computer equipment offers a couple of advantages that you may find attractive. The up-front money or down payment is obviously lower than what's required for outright purchase. Since you're not actually buying the equipment, the payments are usually lower than a financing option, too. For a business start-up, this can be an important consideration.
Some leases, especially those available directly from a computer's manufacturer, have a $1 option that allows you to purchase the computer at the end of the lease for $1.
Because you're basically renting the equipment instead of buying it outright, lease payments are normally fully tax-deductible.
Leasing does have disadvantages, though. Suppose, for instance, you find attractive terms on a five-year equipment lease. Stop and think for a moment how rapidly technology changes, as well as how rapidly prices seem to drop. If you get locked into a five-year commitment, you may find yourself three years from now languishing on an underpowered, outdated PC.
The bottom line: There is no single "right" answer to how you should finance your business computer. Each entrepreneur's situation is different. I suggest you look closely at every option available and then answer the following questions for each: How much cash will I have to spend up front? How much will I have to pay in interest and finance charges? How much are the monthly payments? How will this financing method affect my tax situation? What happens if I decide to buy a new computer two years from now?
Answer these questions with the help of a qualified tax expert and you're sure to find the financing option that's right for you.