Fund of wisdom
- 01 December, 2002 22:00
Cash-rich US vendors are coming up with new ways of encouraging budget-bound or plain skinflint customers to spend — such as offering to finance them into deals. Does their largesse extend to New Zealand customers? Not always.
Here, where the market is in sounder shape, vendors don’t feel the same need to provide incentives and traditional financiers are finding smarter ways to gain corporate custom.
When Contact Energy decides to buy a significant amount of IT equipment, the power producer runs the various funding options through a financial model to see which comes out best.
GM of information management Iain Graham says Contact looks at financing and IT investment in the same way as any other part of the business. It evaluates the most efficient way of using money and would consider whatever special offers the vendors came up with.
Graham says this means the method of purchase is made on a case by case basis, so, for example, Contact’s IBM desktops and servers were leased while the Toshiba laptops were bought.
“What you do is look at the economics of the deal. There are also issues of disposal at the end of the product’s life,” he says.
This includes what value a product may have on disposal, how it might be disposed of (including wiping hard drives before sale) and the cost of someone doing this.
Lending from the vendor
Organisations that need finance to make an IT purchase are now faced with an increasing array of funding possibilities, from simple loans to leasing or licensing, or even a combination thereof.
Growing competition among vendors means they increasingly offer finance as part of their package. Often that might be where they make their margins, as opposed to on the goods themselves.
Vendors claim financing options can help balance sheets, preserve cash flow, enable predictable monthly payments, reduce the total cost of ownership, give tax advantages and lead to a better use of the IT budget. It’s a lot to hope for.
Microsoft, the biggest vendor on the block, recently decided to extend its plan to lend money to New Zealand customers to finance IT solutions. Two months ago the company set up Microsoft Capital in the US, which lent more than $US20 million in its first 40 days. The money can be spent on Microsoft software or that of its developers, Microsoft or partner services, or hardware.
Both IBM and Hewlett-Packard have their own financing divisions, IBM Global Finance and HP Financial Services.
Last month tough times in the IT sector forced IBM to offer a 90-day deferral of financing payments — nothing down, no payments and no interest until 2003. Big Blue is also touting lower finance terms, and bargain-basement leasing rates for IT like server hardware.
IBM’s division lends not only for those buying its own products but also those of other vendors.
For small businesses, IBM’s Success Lease programme promises simplified applications and credit reviews and multiple small drawdowns against a pre-approved credit limit.
Larger organisations, like local councils, are promised customised payment options to meet budget needs and even deferred payments for an agreed period. IBM will provide sale-and-lease-back arrangements of existing owned technology, with asset management systems and end of life asset disposal.
Alternatively, IBM will bundle other financial benefits into an offer such as providing a technology swap option in its PC FleetLease offering.
Then there are product-specific offers, such as financing for storage area networks. Here IBM will wrap services, software and hardware together.
IBM Global Finance Australia/New Zealand general manager Andrew Rutter says financing lets businesses implement new technology quicker, improve their asset tracking and easily dispose of their assets at the end of their lease. Businesses also reduce their risk of technological obsolescence and increase their flexibility to add and reduce capability. And whatever option is used, Rutter says costs are kept down because Big Blue claims an effective used equipment remarketing network for old stock.
HP similarly offers traditional loans and leasing, or combinations thereof, including sale-and-lease-back options on existing assets. Some third-party products are covered and HP offers utility pricing options as part a wider “on demand” offering.
For a larger organisation, HP promises tailored solutions based around cashflow considerations, the estimated lifespan of the product, accounting requirements, specific project requirements and a longer term IT roadmap. It will also offer lease management and global lease pricing, and a web tool to help with asset management.
“Traditional lenders may not finance software, services and project management fees,” says HP Financial Services Asia-Pacific head John Sutherland. “Meaning the client would have to buy the soft costs outright.” Being able to finance the total IT solution simplifies the procurement process for the client, he says.
For smaller business clients, those who will typically spend under $20,000, HP will usually refer them to its financing partner, Flexirent Capital.
The traditional route
For those who don’t wish to buy from their vendors, the options are also expanding.
Three months ago ANZ Bank set up a specialist vendor solutions division to handle corporate purchases across Australasia, enabling it to provide more individual service for these high-value clients. It has no specific lending policy covering IT products for small and medium-sized businesses, says spokesman Steve Fisher.
“Any loan would therefore follow our normal rates, or those agreed to between the business and their relationship manager. On the corporate side it is very difficult to say, because this sort of thing works on a case-by-case basis,” Fisher says.
Westpac pushes its corporate loans through AGC, which the bank last year sold to GE Capital. ASB Bank, for its part, and its parent, the Commonwealth Bank of Australia, has a partnership with financiers Computer-Fleet for its IT lending. Any patriot hoping for business finance from the state-owned Kiwibank will be disappointed, as it deals with the personal sector only.
Marac’s commercial finance manager, Sarah Selwood, says many vendors link up with a business partner to offer finance. The finance company does both, offering loans directly or through a vendor, who would then carry the credit risk.
“If it [any default] relates to performance issues, we have the vendor on the hook as well,” she says.
When dealing direct with smaller organisations, Marac limits the software to around 5% of the loan, with the hardware as security.
For larger outfits, such as governments or corporates, a larger amount can be unsecured as the financier assesses funding on the strength of the business rather than the asset. Deposit requirements are also made on the strength of the business, up to 30% for smaller firms, less for established businesses and often no deposits are necessary from large corporate and government organisations.
IT products represent poor security because they devalue quickly, so loans are primarily assessed on the business not the security.
“We avoid start-up businesses with no proven history, because the asset is no security,” Selwood says.
Interest rates are determined on the business risk, so a mortgage backed by the security of a house will have a lower interest rate than, say, a loan secured on a car. Technology products are an even higher risk, but less so than an unsecured loan, so interest rates here average 11% to 14% for IT purchases, depending on the size of the loan and the perceived risk.
Selwood says buying is always cheaper than financing or leasing but it depends on the individual circumstances of the businesses. Some of her clients want to own their equipment and don’t care if it will become obsolete, while others want a quick disposal of redundant stock.
And customers also need to look at the “opportunity cost” of laying out, say, $25,000 when they might need that cashflow for something else.
Financing is increasingly seen “as the way to go”, she says. Vendors too are keen to offer it to make a sale, and if that means the client does not have to offer cash up front they will more likely close the deal, Selwood says.
The argument against owning
While a word with the bank manager may secure a traditional loan, ANZ and ASB could well push you towards their leasing divisions.
ANZ’s vendor solutions arm offers $20,000 and upward to trans-Tasman institutions, government and the education and healthcare sector. The financier takes ownership of an asset and the company pays a rental over an agreed term.
Senior manager Warrick Gibbs says the company can claim back GST on the rental of the asset and the customer does not have to worry about the asset becoming obsolete as it can simply upgrade.
The customer has capital freed up for other uses, and since they don’t have to account for the asset they save on administration. The cost of such a lease or rental is determined by the risk of the asset, and the likely value that asset might fetch at the end of the lease period.
“Interest rates do not come into it because we quote a rental, not an interest rate,” Gibbs says.
The only disadvantages for this system that he could see were that the customer would face penalties for early termination of the agreement and there was no guarantee that they could buy the equipment at the end of its term.
ComputerFleet claims to reduce the total cost of ownership of technology equipment by 15% through its lease and asset management systems.
Senior relationship executive David Roe says specialist financiers often have superior offerings and costs as finance is their specialty. Obtaining finance allows the customer to then go to the vendors and negotiate better deals as they can then pay up front.
Roe contrasts this with the perceived convenience of a vendor acting as a one-stop shop, saying companies may lose out by being locked into certain brands and obtaining a higher cost of finance.
The rates of leasing finance again vary on the individual circumstances of the client and their perceived risks. Because they are not an interest rate, but rather a rental, they are also determined by the value of the equipment at the end of the rental term.
Consequently, ComputerFleet has a large second-hand distribution network, Roe says.
Licensed to compare
Computer Associates believes its short-term licensing model is better than other funding systems because it allows firms to “try before you buy”.
CA offers licences for as little as a month, letting a firm evaluate whether the software product you obtain is what you really need.
NZ operations director Paul Wallace says such a system reduces a firm’s evaluation process and the trial will give a customer enough information about whether to continue with their purchase, based “not just on technical numbers, but on hard numbers”.
Wallace says this system, offering licences from one month to three years, avoids the need for finance, which is the case with the pertual licensing model. It also allows customers to avoid budgeting constraints by just paying for enough time to take them until the next financial year when the customer may have the resources to make its longer-term commitment.
A one-month licence, he says, costs slightly more than a tenth of an annual licence, so a yearly licence would pay for itself, usually, in the 10th month.
However, the best option would depend on the individual circumstances of the customer and they would have to be worked out, he says.
However, since we are talking about tens of thousands of dollars, Wallace offers a few rough calculations.
Average monthly payments can be $300 to $3,000. Such a $3000 a month deal equates roughly to a $30,000 annual fee or $90,000 to $100,000 for outright purchase, he says.
Since CA began offering 30 or 40 products on this model, including Unicenter for infrastructure management, Brightsore storage, eTrust security and the CleverPath portal, the company claims about 50 customers have chosen to pay on a monthly basis.