Technology continues to rapidly evolve. At its core for most businesses is the data center, which must remain modern and cutting edge. Keeping equipment current while preserving cash flow can be challenging. Understanding financing options to control the cost is key.
As many CPAs have asked for guidance in order to be able to provide counsel to clients, read on to explore and understand the available options.
Data centers operate at the core of many companies. Through them run vital systems for sales, customer relationship management, human resources and more. When they're working smoothly, they're often taken for granted, but if a problem arises, everyone in the company is affected. Because of its central role in all company operations, data center equipment must be kept current and, most importantly, secure.
With rapid changes in technology, a state-of-the-art piece of equipment can become a doorstop in just a few months. To keep performance optimal, data center operators should consider upgrading equipment when new technology becomes available. Not only does upgrading improve performance, but it also helps a company remain competitive and maintain security. Newer equipment often forms a better defense against cyberattacks.
Making smart financing decisions
In a fairy-tale world, a data center operator could just pay cash and buy new equipment every few years, but that would require a huge amount of capital that most real-life companies don't have. Additionally, buying new equipment outright can leave a company trying to sell out-of-date equipment a few years down the road in an attempt to recoup at least some of its investment. To avoid these pitfalls, many companies are turning to nonpurchase options funded through lease loans to finance their data center upgrades.
- Operating leases: For equipment subject to rapid technological advances, such as servers, and those with high maintenance costs,
operating leases often make good financial sense. Users pay a monthly rental fee that has a predictable impact on cash flow, and there's no obligation to purchase the item at the end of the lease period. When the lease is up, the lessee simply returns the item and replaces it with a newer model. Lease payments are treated as expenses on the income statement.
- Finance (formerly capital) leases: Some data center items, including heating and cooling systems, racking and backup generators, have a longer working life, often 10 to 15 years or more. For these types of equipment, finance leases are often a better choice than operating ones. They offer the ability to spread out the cost of ownership over several years with a bargain buyout (sometimes just $1) at the end of the lease term. Lessees can claim depreciation on the asset, which may lower their tax liability.
- Hardware as a service: A third option is the
hardware as a service model. In HaaS situations, the user may not host the equipment on site but instead communicate with it via IP connections. The remote computer does the brainwork and sends the processed data back to the user. The user contracts with the HaaS provider and the cost is accounted for as an operating expense, not a capital one.
- Consumption-based leasing: This model is similar to HaaS, but rather than the user paying a fixed monthly fee, they pay only for the amount of services they use.
Consumption-based leasing works best when it usesdigital technology to better match actual to predicted usage , so both the lessor and lessee bear a reasonable part of the risk for over- or underuse costs.
Planning for an upgrade
Because a data center is so widely connected to all aspects of a business, it's important to plan for any upgrade carefully.
The most important part of an upgrade plan is finding a financing partner that understands the needs of the industry. Some lending partners work as intermediaries, connecting equipment manufacturers with end users and brokering a lease financing agreement between them. With the right lending partner, a data center upgrade can improve operations while keeping costs in line.
