IT Equipment Financing: A Model Purchase? - IT Week

Monday, September 19, 2005

by Sarah Perrin, Best Practice

Models for IT financing are evolving all the time, and companies are no longer restricted to either buying or leasing equipment

Making decisions about how to finance IT involves far more these days than comparing the upsides and downsides of cash purchases versus loans, and hire purchase against leasing. As an alternative to obtaining in-house software and systems, new IT models are emerging under names such as ‘on-demand computing’ or ‘software-as-service’, offering a different method of procuring and paying for IT.

When it comes to financing traditional IT resources, companies seem to be moving away from bank loans. According to a survey by Siemens Financial Services, 43% of medium-sized UK businesses use leasing to finance IT projects, compared to 20% using loans."

Just 1% opted for hire purchase, reflecting the fact that the pace of technology change is now so fast that ownership of technology is seen as less important than ‘in-use’ benefits.

Robert May, managing director of Ramsac, a generic reseller servicing the SME industry, firmly believes in using lease finance whenever possible. ‘Presumably the advice that accountants are giving to their clients is around good cash management,’ he says. ‘On that basis, don’t spend your cash on something that’s going to depreciate. Treat the equipment you are using like gas or electricity and rent it.’

With a traditional lease, at the end of the term, the ownership of the equipment can often, if desired, be transferred to the company for as little as one more payment period.

Financing options continue to develop. As May points out, five or six years ago finance was generally only available against items that could be reclaimed if the lessee defaulted, that is, hardware. ‘Now it’s very easy to finance entire IT projects, for example, training and support as well,’ he says.

May adds that it is also possible to include equipment already purchased in the financing agreement. For example, a firm seeking finance for new accounting software could include its existing photocopiers in the agreement, allowing it to get cash back from the deal.

Finance packages are widely available from all the major IT companies. IBM, for example, will finance IBM and non-IBM hardware, software, training and support costs. Jens Teichelmann, director of channel and SMB (small and medium business) financing at IBM Global Finance, sees some big advantages from leasing IT.

‘Businesses can deduct the cost from income, which can potentially reduce tax. Secondly they don’t have to pay over the length of the lease the full amount, as they would if they were buying it upfront,’ Teichelmann says. This is because IBM can estimate relatively accurately the IT equipment’s residual value at the end of the lease term, reducing the total lease cost.

At the end of the lease term (three years on average), if the business no longer wants the IT equipment, IBM will take it back and potentially refurbish it ready for selling or leasing to new clients. For SMBs who do not require the most up-to-date technology, this can also be an attractive way of gaining cost-effective technology.

IBM’s financing arm also tries to adapt its finance offering to individual business needs. ‘When SMEs invest in IT, there are usually a lot of upfront costs before they receive the benefits,’ Teichelmann says.

‘We are able to structure the lease in such a way that it overlaps with the benefit. If a SAP implementation takes three or four months, we can say that in the first three or four months you won’t pay anything, but start the lease payments from then on.’

When considering the financing options for new IT systems, it’s also worth taking a broad view and looking at some of the new ways that IT services can be delivered. Take the ASP (application service provider) model. This essentially involves an IT company supplying software applications and services on a pay-per-use basis.

The ASP hosts, manages and maintains the applications at its own website and makes them available to users via the internet. The great advantage for small companies is that they have access to the latest software without having to invest large sums. Such ‘on-demand computing’ or ‘software-as-service’ models are becoming increasingly common.

Dr Paul Booth, technical manager at the ICAEW’s IT faculty, says the ASP model now seems to be taking off. ‘It does look to be a model that is coming into its own after unjustified hype a few years ago, before broadband became common,’ he says. The fact that telecoms technology is now available to support the IT has made a big difference to the practicability of such online IT models.

There has been plenty of ASP product development in the accountancy sector. ‘There are a number of accounting products that are being sold into accountancy practices as a means for them in turn to offer what would have been called bureau or bookkeeping services in the past, but are now much more sophisticated,’ Booth says.

‘They enable the client and the accountant to have access as appropriate to the system.’

Clients access the software online to enter the usual accounting data, such as invoices, while the accountancy firm can access it to run reports that support advisory work. ‘That’s what makes the ASP model that much more attractive to an accountancy practice,’ Booth explains. ‘It enables them to provide the means to do the low-level work, the basic bookkeeping, and gives them entry into more value-added work.’ (See box above for three such products available today.)

ASP models are best suited to stand-alone applications, such as accounting software, office productivity suites, sales force and customer relationship management (CRM) applications, and HR packages. Major IT players such as Siebel, Oracle, SAP and Sun Microsystems have online offerings, as do newer entrants to the market such as salesforce.com, a leader in the online CRM field.

The cost of Siebel’s CRM OnDemand service in the UK starts at £50 per user per month, and is applicable to sales, marketing and service personnel.

There are now 40,000 users of the service, and an average of 20 users per company. Although primarily aimed at SMEs, large companies have also been signing up in order to provide cost-effective CRM software to staff who may only need to use it occasionally.

Using the system is simple. There is no need to invest in servers or networking. Once a company has loaded up its data, it can access it from anywhere in the world.

A small company with 20 people wanting to use the system could realistically have Siebel’s CRM OnDemand up and running within a week, according to Neil Morgan, Siebel’s EMEA vice-president for marketing.

‘For big procurement, companies have always had the option of leasing and so paying over time,’ Morgan says. ‘Now this pay-as-you-go model for hosted software gives that to anyone. We have people [customers] with one or two users in a 10-man company.’

Morgan sees three key benefits arising from the model. ‘One is that you can spread the cost over a long period of time. Secondly, it completely changes the risk profile of the IT programme because there is no upfront investment and you can stop it at any time.

Thirdly, it comes out of expenses rather than capital budget, and that has changed the nature of procurement.’

Sarah Perrin is a freelance journalist

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Abu Dhabi Investment House announces 1st equity investment; Acquires stake in Bahrain's First Leasing Bank

Saturday, September 17, 2005

The newly formed Abu Dhabi based financial institution, Abu Dhabi Investment House (ADIH), Tuesday announced that it had acquired a stake in Bahrain’s First Leasing Bank (FLB), contributing to its capital.

Incorporated in 2004, FLB is the first bank in Bahrain dedicated exclusively to the introduction and expansion of equipment leasing throughout the GCC. The company’s primary leasing products are Finance Leases and Operating Leases, to the commercial and government sectors in the region.

With this development ADIH, which was incorporated in September this year, joins Bahrain based institutions, Gulf Finance House & Ithmaar Bank; the US-based Overland Capital Group, and the Kuwait based Gulf Investment House, as the principal institutional shareholders of FLB.

Announcing ADIH’s equity acquisition in FLB, Mr. Rashad Yusuf Janahi, member of the Founder’s Committee and Chief Executive Officer, ADIH said: “ADIH has been set up with the aim of providing diligent investors a variety of high-yielding investment opportunities in the region. We have identified equipment leasing as one such business sector that has potential for tremendous growth.”

Promoted by a group of prominent businessmen, leading institutions, and investors from the UAE and the Gulf region, ADIH focuses on existing as well as emerging potential for investments in private equity, capital markets, asset management and investment placement.

Mr. Janahi added: “Economic liberalization in the region, which is reflected in an increased focus on privatization initiatives, enhanced government spending on infrastructure and employment programs, and the growth of sophisticated financial investments are all sure signs of economies ready to move beyond cash and term loans in order to build capital infrastructure.

As one of the pioneers in the area of equipment leasing in the region, FLB has in the short period since its launch succeeded in making leasing an integral and sophisticated force in the capital formation structure of GCC companies and institutions through a series of innovative products and services for lessees, investors and vendor partners.

“Our decision to partner with FLB was made after a thorough due diligence exercise, which included a careful study of both the market and the existing players within the equipment leasing sector. We firmly belive that as a provider of high-quality asset based financing, FLB effectively combines sound local knowledge, with a strong management team that has substanial international experience in lease-financing,” added Mr. Janahi.

Welcoming ADIH’s equity particpation in FLB, Mr. James A Cracco, Chief Executive Officer (CEO), FLB said: “Our partnership with ADIH will provide us with added bandwidth, resources and reach to aggresively pursue our core objectives of serving the business community in the region through leasing and other investment tools and thus enhance both productivity and profitability.”

“We at First Leasing Bank are especially looking forward to working closely with ADIH and their contacts to increase our economic presence in the UAE and the GCC,” added Mr. Cracco."

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BASICS OF LEVERAGED LEASING

Thursday, September 15, 2005

BASICS OF LEVERAGED LEASING
By Richard Contino

What Is the Concept of Leveraged Leasing?

The leveraged lease can be one of the most complex and sophisticated vehicles for financing capital equipment in today's financial marketplace. The individuals and firms in the leveraged leasing industry are aggressive and creative. As a result, the environment is one of innovation and intense competition.

Is the concept of a leveraged lease complex? Not really. It is simply a lease transaction in which the lessor puts in only a portion, usually 20% to 40%, of the funds necessary to buy the equipment and a third-party lender supplies the remainder. Because the benefits available to the lessor are generally based on the entire equipment cost, the lessor's investment is said to be "leveraged" with third-party debt. Generally, the third-party loan is on a nonrecourse-to-the-lessor basis and ranges from 60% to 80% of the equipment's cost. The nonrecourse nature means the lender can only look to the lessee, the stream of rental payments that have been assigned to it, and the equipment for repayment. The lessor has no repayment responsibility even if the lessee defaults and the loan becomes uncollectible.

The fact that a nonrecourse lender cannot look to the lessor for the loan repayment if there is a problem is not as bad as it seems for two reasons:

1. The lender will not make a nonrecourse loan unless the lessee is considered creditworthy, and,

2. The lender's rights to any proceeds coming from a sale or re-release of the equipment comes ahead of any of the lessor's rights in the equipment and lease. The lessor's equity investment is subordinated to the loan repayment obligation. If a lender only contributed, for example, 70% of the funds necessary, the subordination arrangement would put it in an over-collateralized loan position that, in turn, would decrease its lending risk.

Although the third-party loan is usually made on a nonrecourse basis, this is not always so. If the lessee's financial condition is weak, a lender may only be willing to make a recourse loan. Under this type of loan the lender can look to, or has recourse against, the lessor for repayment if it cannot be satisfied through the lessee or the equipment. The lessor still, however, has the economic advantage of a leveraged investment.

Although the concept of leveraging a lease investment is simple, the mechanics of putting one together is often complex. Leveraged lease transactions, particularly ones involving major dollar commitments, frequently involve many parties brought together through intricate arrangements. The "lessor" is typically a group of investors joined together by a partnership or trust structure. The partnership or trust is the legal owner, or "titleholder," of the equipment. The "lender" is often a group of lenders usually acting through a trust arrangement. This is further complicated by the fact that each participant will be represented by counsel with varying views. As a result, the job of organizing, drafting, and negotiating the necessary documents is generally very difficult.

Observation: Because the expenses involved in documenting a leveraged lease can be substantial, transactions involving less than $2 million worth of equipment can be economically difficult to structure as a leveraged lease. If, however, documentation fees (such as counsel fees) can be kept within reason, smaller equipment amounts can be financed in this manner. In many cases a prospective lessor or underwriter has an in-house legal staff with the ability to originate and negotiate the required documents. If so, this will help keep costs down. Generally, leveraged lease financings are arranged for prospective lessees by companies or individuals who specialize in structuring and negotiating these types of leases. These individuals and firms are referred to as lease underwriters. Essentially, their function is to structure the lease economics, find the lessor-investors, and provide the necessary expertise to ensure that the transaction will get done. In a limited number of situations, they also find the debt participants. They do not generally participate as an investor in the equipment.

Underwriting

Because the vast majority of leveraged leases are brought about with the assistance of lease underwriters, lease underwriting has become synonymous with leveraged leasing. The premise on which lease underwriting services are provided by an underwriter (that is, on a "best efforts" or "firm" basis) varies significantly. It is, therefore, worthwhile at this stage to explore the two types of underwriter offers: "best efforts" and "firm commitment" underwriting arrangements.

A 'Best Efforts' Underwriting Arrangement Can Be Risky

Lease underwriting transactions are frequently bid on a "best efforts" basis. This type of bid is an offer by the underwriter to do the best it can to put a transaction together under the terms set out in its proposal letter. There are no guarantees of performance. As a result, a prospective lessee accepting the offer may not know for some time whether it has the financing. In practice, a best efforts underwriting is not as risky as it appears. Most reputable underwriters have a good feel for the market when bidding on this basis and usually can deliver what they propose. Thus, there is a good chance they will be able to get "firm commitments" from one or more prospective lessor-investors to participate on the basis offered.

Recommendations:

A prospective lessee must always keep in mind that a best efforts underwriting proposal gives no guarantee the transaction can be completed under the terms proposed. Thus, it must give careful consideration to the experience and reputation of an underwriter proposing on this basis before awarding a transaction to it. An inability to perform as presented can result in the loss of valuable time. When there is adequate equipment delivery lead time, a prospective lessee may be inclined to award a transaction to an unknown underwriter who has submitted an unusually low bid. There is, however, a risk that must be considered. If the transaction is so underpriced that it cannot be sold in the "equity" market, it may meet resistance when it is reoffered on more attractive investor terms. This can happen merely because it has been seen, or "shopped," too much. It is an unfortunate fact that when an investor is presented with a transaction that it knows has been shopped, even if the terms are favorable, it may refuse to consider it. A prospective lessee, thus, should not be too eager to accept a "low ball" best efforts bid unless it has taken a hard look at the underwriter's ability to perform. Best efforts underwriters sometimes submit proposals that are substantially below the market. At times this happens by mistake. For example, transactions may have been priced in good faith based on acceptable investor market yields, but by the time the award is made the market has moved upward. At other times, an underwriter may intentionally underprice a transaction to make sure it wins it. If it cannot be placed as proposed, the underwriter will go back and attempt to get the prospective lessee to agree to a higher rental rate. With its competitors no longer involved, it may be in a good position to do this. A prospective lessee with near-term deliveries must be particularly careful in recognizing this possibility. Otherwise, it may have little choice but to be pushed into a less favorable deal.

A prospective lessee can control the risk of nonperformance under a best efforts proposal by putting a time limit on the award, for example, by requiring the underwriter to come up with, or "circle," interested parties within one week following the award and securing formal commitments by the second week. It is not unheard of for a prospective lessee to make a time limit award to an unusually low bidding, or unknown, underwriter without telling the remaining bidders. The purpose is to try to keep them around just in case the underwriter cannot perform. This can be unfair to an underwriter who, in good faith, is continuing to spend time and money on the transaction in the hope of winning it. Doing this can also hurt a prospective lessee in the long run. Reason: It is likely that the other underwriters will find out that this happened. Once the word gets around that a company does business in this manner, reputable underwriters may refuse to participate in future biddings. Even if they do participate, they may quote rates that have not been as finely tuned as possible. Reason: They will not spend the time or money necessary in situations in which they may not be treated fairly. Thus, this tactic is not recommended because a prospective lessee may, as a result, not see the best possible market rates.

A 'Firm Commitment' Underwriting Arrangement Is Often the Best

From a prospective lessee's viewpoint, a "firm commitment" underwriting proposal is generally the preferred type of offer. When an underwriter has "come in firm" it is guaranteeing to put the proposed lease financing together. Typically, before an underwriter submits this type of proposal, it has solid commitments from lessor-investors to enter into the transaction on the terms presented. This, however, is not always the case. The underwriter's firm bid may only represent its willingness to be the lessor if it cannot find a third-party lessor.

Recommendations:

If an underwriter proposing on a firm basis does not have "committed equity" at the time its proposal is submitted, a prospective lessee may be subject to certain risks. Unless the underwriter is in a strong financial position, its commitment may be worthless if a third-party lessor cannot be found. Thus, a prospective lessee must always investigate whether an underwriter has lined up one or more lessor-investors. If not, the underwriter's financial condition must be reviewed to determine, before making the award, whether it has the financial ability to stand behind it. Underwriters sometimes state they have firm "equity" even through they have nothing more than a verbal indication from a prospective lessor-investor's contact that it will recommend the transaction to its approving committee. Thus, a prospective lessee must ask to be put in touch with each lessor-investor to confirm its position. Doing this will also ensure that there are no misunderstandings as to the transaction terms.

Richard M. Contino, author of several books on equipment leasing, is an internationally reputed expert on leasing. Richard Contino is the managing partner of Contino & Partners, a practising attorney firm based in New York. http://www.continopartners.com/

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Lease or Buy? That is Always the Question with Car Financing

Sunday, September 04, 2005

Leasing is a perfectly viable and legitimate way to finance a new car. Although leasing offers attractive benefits, it is somewhat more complex than buying with a loan. This means there can be pitfalls if a decision to lease is made for the wrong reasons.

Therefore, a comparison of leasing versus buying is always a useful exercise when considering automobile financing. One option will generally be decidedly better than the other in any specific situation.

Let's first look at the financial side of the analysis.

Leasing always results in lower monthly payments than a conventional automobile loan, assuming the same vehicle, same down payment, same interest rate, and same term. Lease payments will be as much as 60% less than loan payments. Therefore, if monthly payments are your most important consideration, leasing is a good financial option (although there may be other reasons you shouldn't lease -- see below).

However, in the long term, leasing actually costs more than buying assuming that the buyer keeps his/her vehicle for a long time after the loan has been paid. It doesn't take rocket science to figure out that leasing a new car every two or three years costs more than buying one car and keeping it until it falls apart. So if long-term cost is your highest priority, then leasing is not for you.

Even if leasing makes financial sense to you, there may be reasons that it won't work for you.

If you drive more than about 15,000 miles a year, leasing is not a good option for you. The reason is that leasing is designed for people who typically drive only average miles and don't want to pay for the entire value of a vehicle. They only pay for the relatively small part of the value of the vehicle that they actually use.

Leasing may not be a good option, too, if you don't typically maintain your vehicles well, carry only minimum insurance, like to modify your vehicles, or prefer the idea of ownership.

Furthermore, if you expect lifestyle changes (marriage, divorce, job change) that might cause you to want to end your lease before its normal end date, don't lease. Leases are designed in a way that makes it both troublesome and expensive to terminate early.

Al Hearn is owner and operator of LeaseGuide.com (http://www.LeaseGuide.com), a popular web site for automotive consumers interested in leasing. The web site has helped thousands of visitors since 1995.

Article Source: http://EzineArticles.com/

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