How do you spell obsolescence?


Kevin F. Clune CLFP

“Goodbye to the Gas Pedal”, an article that appeared in the Chicago Tribune  earlier this month, reports that Volvo will only produce all-electric or hybrid vehicles by 2019. Similar plans for Volkswagen.  Rolls Royce announced that they will soon be all electric, with no hybrid engines. Other auto manufacturers will quickly follow suit.  According to a report by Bloomberg, “Electric vehicles will be cheaper to buy and have lower lifetime costs as soon as 2025 and make up more than half of global new car sales by 2040”. 

This is the definition of obsolescence!

We throw this term around in the Leasing Industry as a reason to consider an operating lease to finance equipment.  The alternative would be an outright purchase, a capital lease, or a bank loan. All of these methods of acquisition will result in ownership at the end of the term.  

However, for collateral that is subject to obsolescence, business owners are advised to use an operating lease to finance the equipment. This type of lease will have added features:  

  • Easy Budgeting
  • Easy Upgrades
  • 100% Financing
  • Tax Benefits

The monthly lease payment will remain relatively steady throughout many upgrades as you trade out the outdated equipment for newer models. Your budget will not be adversely affected by the periodic large hits of replacement costs.

With constantly changing technology, business owners are able to remain on the cutting edge and stay competitive with this lease program. They no longer risk the loss of customers due to inadequate equipment or the hassle of remarketing depreciated assets.  

The total cost of acquiring hardware usually includes soft costs, installation, service, and supplies associated with the functioning of the equipment. A leasing customer can usually include all of these costs in the financing package of a lease.

Finally, payments on an operating lease  are treated as an expense which may have tax benefits for the business.
It is advisable that you confirm this with your tax advisor. 

For the record, I am not advocating that you replace your gas powered car immediately. I am only using this prediction for illustrative purposes.

I do recommend an operating lease for businesses that are acquiring any equipment that will be subject to obsolescence. We all know what happened to the “buggy whip” industry.

Kevin F. Clune, CLFP
Clune & Company LC