IT shops borrow money, lease in droves as recession strains budgets

IT shops are seeking loans and lease agreements in rapidly increasing numbers as they struggle through a recession. The worldwide market for IT financing and leasing is set to exceed US$100 billion in calendar year 2009.

Last year, $88 billion of IT hardware, software and services was financed or leased, compared with $80 billion in 2007 and $72 billion in 2006, according to IDC.

"There is an uptick in IT leasing and financing practices. Companies are considering it because of the constraints around capital investments," says IDC analyst Joseph Pucciarelli. "You're looking at a year-over-year growth rate that exceeds 10%."

Financing and leasing of software and services is growing about 20% a year, while hardware financing is growing at a slower rate of 4%, IDC analyst Susan Middleton says.

Besides the short-term benefit of delaying purchase costs, companies are also responding to new tax benefits provided by the federal government. Pucciarelli said the Economic Stimulus Act of 2008  offered new levels of tax incentives for purchasing IT equipment and software.

IDC and vendors with large financing arms such as IBM, HP and Dell expect that demand will continue to increase this year. IBM is getting ready by pledging $2 billion of financing money for technology projects related to the American Recovery and Reinvestment Act of 2009, saying the money will go to healthcare organizations, energy providers, enterprises and municipalities.

"Every CFO or treasurer I meet is re-looking at their capital structure and how they use cash," says Richard Dicks, the general manager of IBM's Global Financing team in North America. "They're looking for other ways to acquire IT assets."

Customers that were already financing and leasing IT purchases are turning to that option more often, and customers that previously avoided borrowing have concluded that financing is now necessary.

CFO Bill Shea of 1-800-Flowers says his company obtained a three-year lease from IBM to purchase WebSphere software, which the New York-based company is using to revamp Web sites devoted to its various food brands.

"With cash flow being lower than in prior years, to keep a little more powder in the gun we did use financing," Shea says. "It has not historically been a vehicle that we've used [for IT purchases] but we did use it this past year with the economic downturn."

Shea says 1-800-Flowers borrowed about $3 million on an unsecured lease line with about a 5% interest rate. Although it is technically a lease agreement, 1-800-Flowers will own the software at the end of the three years. That's a good deal, he says, but Shea would rather not have to resort to financing in the future.

"A lot of it depends on how the economy changes," Shea says. "Does the consumer come back and buy with the vigor they were back in 2007 and 2008? All things being equal, we would just use our cash flow to fund our capital needs, as we did for many years, and use financing for acquisitions and working capital purposes."

Many companies are finding it harder to borrow from banks to fund acquisitions and other general business purposes, but they can still get financing from the lending arms of IT vendors, Dicks notes.

Just like banks, IT vendors are selective about who they lend to. If your company's credit is bad, prepare to pay a higher interest rate. But IBM, HP and Dell all report that they are approving more financing and leasing dollars this year than last.

That's significant considering the depths to which IT purchasing has sunk. Global IT spending is expected to decline nearly 4% in 2009. The server market which HP, IBM and Dell rely upon for much of their revenue is free-falling, for example, with sales dropping faster than they did during the dot-com crash. IBM, HP and Dell all suffered server revenue declines of 20% or more in the first quarter of 2009.

But for all types of products, HP did $1.2 billion worth of financing and leasing in the three-month period ending April 30, compared with $1.1 billion the previous year.

"In 2008 we grew the business at a double-digit rate across the board, in volume, revenue and profitability," says Irv Rothman, president and CEO of HP Financial Services. "Thus far in 2009 we're growing the business at a slightly slower rate. But we are growing the business, so that's good."

Dell Financial Services says its penetration rates (the percentage of overall sales attributed to financing and leasing) have risen 10% to 20% depending on the segment.

Across small businesses, large enterprises and public agencies, "we're seeing a lot of stress with regard to trying to manage their capital expenditure budgets and at the same time maintain a competitive, up-to-date IT infrastructure," says Larry Graves, a vice president and general manager with Dell Financial Services. "We've seen it with some very large Fortune 500 companies who have always purchased equipment, and are now starting to look at financing as an option."

IBM Global Financing says it is still the largest IT financier in the world, with 3,000 employees, $36 billion in assets and 125,000 customers. In North America, 42% of all IBM hardware purchases are financed, but demand for financing software and services is growing faster as the price of hardware declines, Dicks says.

"Software and services are becoming a bigger part of the portfolio," he says. "We're having more conversations with clients. ... These aren't people getting ready to go bankrupt. These are strong players, with strong credit who want to grow their businesses."

Obviously, vendors want to steer customers toward their own equipment. But they aren't opposed to financing the purchase of rival technology as long as it's part of a larger project involving their own products.

Customers can borrow money from commercial banks, but there are advantages to borrowing from the vendor, Rothman says. As part of a financing or leasing agreement, HP can help customers dispose of obsolete equipment in an environmentally friendly way and without exposing sensitive data, he notes. According to Dicks, IBM keeps its interest rates competitive in part by taking back old equipment, refurbishing it and reselling it.

A typical IT financing or leasing deal lasts three years. While some zero-percent loans have been offered, typical interest rates can range anywhere from 4% to the low teens, according to Graves.

Companies with bad credit ratings shouldn't expect an easy ride just because the vendor wants to sell them a product, Pucciarelli says. Even when financing is provided by an IT vendor, the terms have to be responsible. "In the current market, you don't want to be 'aggressive' in financing," he says. "What you want to do is make capital available, on reasonable terms, to companies that have the financial means to handle it."

For some customers, financial considerations aren't the deciding factor when it comes to choosing whether to lease, finance or buy outright, Graves says. Businesses that have fallen behind in equipment upgrades are finding that three-year lease terms force them to be more responsible in providing up-to-date IT services to their users, he says.

One large government customer of Dell's switched from purchasing to leasing because its IT infrastructure had gotten out of date, and it wanted to prevent that from happening again, Graves says. "They chose to lease, not for budgetary reasons but to force them into a technology decision every three years," he says.