The Power of Leasing

 
 
By Alison Diana  |  Posted 2006-12-22 Email Print this article Print
 
 
 
 
 
 
 


Managed services, a recurring revenue business model that is increasingly popular with VARs, lend themselves to leasing, said DiMarco. Channel experts say that leasing IT equipment, in what has become known as “hardware as a service,” rather than buying it outright, goes hand in hand with managed services, and even though the practice remains limited, it is growing.

“As managed services evolve, leasing will evolve as well,” said DiMarco. NWN, a provider of managed services, is investigating several finance options, said Tappen. “We are talking with some banks about bundling financing products and refresh products, so it is all part of the price. Customers need new servers every two years and desktops every three, so they could build it into their budget schedule and plan and then [adjust their leasing arrangement] to refresh that. We could build it all into their monthly fee. That idea came from the bank: They approached us, and we had been talking about it. It has a lot of value to it, honestly.”

Don’t Bank on It

Of course, local lenders and national banks are an alternate source of funding, but since they generally are not well-versed in the technology industry—especially those solution providers and MSPs (managed services providers) that primarily sell intangibles rather than physical products—typical banks usually are leery of the channel’s finance needs, said industry executives. Even so, there are exceptions, as in NWN’s case, when banks with enough knowledge of the channel’s inner workings can be proactive.

More often than not, though, solution providers turn to the very vendors that sell them products for a hand with financing.

“The bank’s business is different from our business,” said Keith Kendall, vice president and managing director, Americas, of HP Financial Services, in Murray Hill, N.J. “Their business, no matter how they mask it, is to lend money for a certain amount of time for a certain rate. Our financing is far more tailored to the customer and to the VAR. We can create below-market finance solutions for specific situations.”

HP Financial Services, which says it has more than $2 billion in annual revenue and $8 billion in assets, has programs such as leasing and pay-per-use designed to encourage corporations to invest in new equipment without the overhead associated with out-and-out buying. Insurance giant Aetna, for example, reduced its total cost of ownership, improved its IT flexibility and slashed its outlay of capital by leasing, according to HP Financial Services literature. Home furnishings retailer R.C. Willey, on the other hand, saved 20 percent over a traditional lease, HP Financial Services states.

Aside from tapping the financing resources of vendors, solution providers can fight high interest rates simply by having cash. Providers with cash on hand can take advantage of today’s more generous returns on cash deposits at bricks-and-mortar or online banks, said Bankrate’s Zanca.

“Generally companies are guarding their cash right now,” Zanca said. “Cash investments are making more sense now. For short-term deposits and [certificates of deposit], businesses really should shop for the best rates. The worst thing you can do is let it automatically roll over.”

Since many technology companies have cash, this could bode well for the entire IT sector, said some observers. “If they have cash in the bank, the interest on that cash goes up and certainly elevates their balance sheets,” said Don More, partner in Updata Capita, in Redbank, N.J., which operates, advises and invests in the IT industry.

Invest in Yourself

Another way to fight high interest rates is to borrow from retirement funds, which is possible to do without incurring penalties, said experts. In addition to traditional IRAs (Individual Retirement Accounts), 401(k) plans or money market accounts that invest in companies, several companies offer “self-directed retirement” funding: Instead of investing in an external business, individuals with retirement accounts can use those funds to form or expand their own company, said David Nilssen, co-founder and CEO of Guidant Financial Group, in Bellevue, Wash.

“A lot of people in business don’t have a lot in savings, but they do have a lot in their 401(k),” Nilssen said. “Typically, small businesses look at several methods of funding—credit cards or [U.S. Small Business Administration] financing or a home equity line of credit.”

With credit cards, SBA loans and home equity loans, the higher prime rate means increased interest rates. But under Guidant Financial’s Audeo program, an individual creates a C corporation and then Guidant sets up a 401(k) and rolls the existing retirement fund monies into the new account. Funds from the Guidant-formed 401(k) then fund the business venture, Nilssen said.

“They’re doing a stock-for-cash swap,” Nilssen said. “It’s not subject to cash or penalties. As far as the 401(k)’s concerned, it’s making an investment in a private business.”

On average, Guidant Financial clients have about $150,000 in their retirement plan and are looking to create businesses worth between $3,000 and $11 million, said Nilssen. Within 30 days—and without the costs associated with a broker or lending fees—the process and funding are typically complete, Nilssen said. “The worst thing that happens is they’ve lost their retirement fund,” he said. “But if the business fails, you’re going to pay somehow.”

That is because, of course, loans are not forgiven, whether they come from the SBA or a local bank. And with a home equity loan, business owners face the potential of losing their residence.

Risks are unavoidable, so experts recommend that solution providers select the least risky financing paths to ease the pain of rising business costs. As for interest rates, experts said they believe a plateau has been reached for the time being.

At its most recent meeting the U.S. Federal Reserve decided to leave interest rates alone. Experts believe the Fed may continue to take that track in the near future, though fears of inflation could trigger more rate hikes.

Whatever happens, experts recommend solution providers keep a good handle on their cash flow, as well as on that of their customers.

Alison Diana is a freelance writer and editor based in Merritt Island, Fla., and has covered the channel and technology for almost 18 years. She can be reached at alisondiana@hotmail.com.

Getting Around High Interest Rates

Solution providers have a multitude of options that can help them keep their cost of doing business under control. Here are some ideas:

* Comparison shopping Look around for high interest rates on any type of savings account
* Customer contact Involve the customer with finance experts from distributors or vendor finance companies to help the customer come up with end user-based funding or financing
* The lease alternative Consider leasing products or services, rather than selling, to defray interest rates
* Retirement plans Look into alternate funding, such as self-directed 401(k) plans
* Talking it out Distributors and vendor finance companies have an array of flexible finance programs to help solution providers afford and win deals

Check out eWEEK.coms for the latest news, reviews and analysis on IT management from CIOInsight.com.


 
 
 
 
 
 
 
 
 
 
 

Submit a Comment

Loading Comments...

 
Manage your Newsletters: Login   Register My Newsletters























 
 
 
 
 
 
 
 
 
 
 
Rocket Fuel