The Business

Let financing take the strain

Customers are looking for alternatives to bank loans and retained capital to fund IT purchases. Leasing and vendor finance is one option, but how should IT consultants navigate the financial maze?
The tougher economic climate – and the resultant difficulties in raising finance – are affecting businesses large and small. With banks cautious over lending to companies, capital investments are being put on hold, and IT is by no means immune.

This is causing difficulties for both IT consultants and their customers. A consulting project, whether it is customising an application, integrating systems, or consolidating servers or storage, might not be able to proceed until the hardware is in place. If customers are struggling to finance a hardware refresh, the entire project is at risk of being put on hold – even if it has the potential to cut a customer’s costs or improve their top line business performance.

As a result, IT consultants are likely to become involved in project financing, whether or not this is a service they currently offer. Luckily, there is a wide range of business finance available to customers, beyond the conventional overdraft and bank loan, when it comes to financing IT investments.

The last year has seen a significant increase in interest for leasing from small and mid-sized companies. Leasing capital assets, and this covers most large IT projects, has a number of advantages.

It spreads the cost of the equipment, software and sometimes, installation and integration, and allows businesses to combine hardware and software costs with maintenance and support into a single monthly payment. There are tax advantages, as most leases can be constructed so that spending is treated as a business expense, rather than capital expenditure. There might be more flexibility, for example to swap out hardware or to upgrade, as newer equipment comes on to the market or a business’s needs expand. And, most importantly in the current climate, leasing opens up a new line of credit to businesses, which may be less affected by the current financial crisis than bank lending.

“Tightening capital markets is an easy answer for the growing demand for leasing, but there’s more to it than that,” says Paul Sheeran, vice president and managing director at HP Financial Services. “Leasing is a tool; the value we offer customers comes in the form of helping them look at their IT investment as a strategic business investment.”

leasing and vendor financing
Companies looking to finance capital-intensive IT projects, whether it is a data centre refresh or upgrading a fleet of laptops, have two main leasing options.

The first is to arrange a lease for the total capital spend through a finance house. These can either be independent players in the financial services, such as GE Capital Finance, or financing arms of the main business banks.

A leasing company will typically offer to cover all or most of the up-front hardware cost of a project, in return for a monthly charge. The amount of deposit required and the finance charges will depend on the nature of the assets, the length of the lease and the customer’s credit history.

Leasing can also offer a considerable degree of flexibility to businesses. Companies can, for example, swap out or upgrade equipment during the period of the lease. It might also be possible to add extra items to the lease, as business needs grow, or in some cases, even arrange asset-based financing on existing IT hardware too. Longer-term leasing arrangements – of three years or more – can have hardware refreshes built in, and the vendor or leasing provider might be able to cover the cost of installation and maintenance.

At the end of a typical 36-month lease, the business can walk away with nothing to pay, and hand back the equipment, sign a new lease, or sometimes buy the hardware for a ‘peppercorn’ sum, or, depending on the lease arrangements, at its then market value.  Most IT financing deals are for finance leases – where the entire cost of the hardware is spread over the leasing period – but some vendors and leasing companies offer residual leases. Residual leases can be cheaper, as the lessor assumes there will be some value in the equipment at the end of the period, and purchases stay off the client’s balance sheet, but residual leases are mostly used for larger purchases.

Promoting flexibility
For clients, the advantage of a lease from a finance provider is flexibility. Customers can mix and match equipment from several vendors, there is one single point of contact, and one monthly or quarterly payment. From the consultant’s point of view, turning to a single finance provider greatly simplifies the arrangements and can reduce the time needed to arrange the leasing deal.

However, a standalone lease is unlikely to be the cheapest option, and there can be other limitations. Leasing companies will take the hardware as security for the finance, and this can limit their ability to allow non-hardware items, such as software or services, as part of the deal. Leasing companies may well demand an up-front cash deposit from clients. The need to raise such a deposit can make third-party leasing less attractive for companies, especially those looking to preserve as much cash in the business as possible. The second option for companies looking to spread their IT costs is to turn to vendors for finance. So-called ‘captive lessors’ – in the main, hardware manufacturers – are putting more emphasis on leasing arrangements, in part in order to keep their sales flowing in the face of a slowing economy.

This brings some attractive options for clients.

Promotional activity from IT vendors means that the effective interest rate on proprietary leasing arrangements can be very low cost. HP announced late last year that it would offer zero % financing on IT purchases over £50,000; Dell offers zero % financing for enterprise solutions. Vendors might offer additional benefits, such as leases that need no deposit, or the ability to extend the arrangement to include software. Apple, for example, allows customers taking on either a finance lease or a residual lease to spend up to 20% of the overall sum financed on software or services.

Building a business model
The breadth of financing options available to customers creates both an opportunity, and a potential headache, for IT consultants, especially those that have not previously dealt with equipment financing.

As well as the need to find a financing partner, and to train staff on the various leasing and rental options, consultants will also need to look at the impact of offering leasing on their own profit and loss accounts and balance sheets. In most cases, consultants will want to work in partnership with a financing company, but they might also be able to leverage vendor financing deals. Third-party leasing companies and banks might be more willing than captive financing arms to give introductory commissions to IT consultants.

The option to earn fees from arranging finance has to be set against the need to offer the best financing deals to customers. Consultants might feel that their priority is to help their clients find the best finance package, and earn their fees on other parts of the project.

Consultants might choose to combine both vendor and third-party financing, in order to provide the most choice – but this can bring an additional administrative burden. “We use either vendor or third-party leases, depending on which gives the best rates,” says Damian Milkins, CEO of ControlCircle, a reseller and IT consultancy focused on the data centre market.

Vendors, for their part, have moved to improve both their offerings and the tools available for consultants and resellers that introduce their clients to financing options, in particular via the Web. According to Kevin Green, Financial Solutions Manager UK & Ireland at NetApp, one of ControlCircle’s key vendors, financial solutions are not a profit-making enterprise. “It is a service to allow customers to access our technology, he says. “As they prosper and grow, their requirements for technology will increase, creating a win-win situation.”

And the desire to help customers update or expand their IT, and the other business that comes with hardware purchases, can make
a degree of administrative input a worthwhile investment.

“Some customers simply don’t want to own the kit, and so are going down the leasing route,” says Damian Milkins at ControlCircle. “We can be a single aggregator for that – we can be a single point of contact, or a single supplier”.

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