Technology and finance professionals see the world through different eyes. To the IT professional, technology – hardware, software and services – is the great enabler, it is the fabric and the plumbing of modern society. Whereas finance professionals are more concerned with supporting business growth with technology while containing operating costs.
Both the IT and finance people want the same thing for a business, although they might come at things from slightly different directions, so finding solutions to address both of their challenges and objectives can be difficult. Traditionally the IT decision maker sources technology from the manufacturer, or more commonly for smaller businesses from a channel specialist. The businesses selling technology will work to find the best solutions for the budgets, though traditionally, they have not been involved in helping to create the budget. Smaller technology investments are usually financed via a mix of options from up-front IT budgets to bank loans, and even credit cards. Consequently, a disconnect exists between the things being bought and the way those purchases are financed.
But the modern decision maker is becoming more ‘finance savvy’. In the software world, cloud services are gaining traction. While on the hardware side, leasing bulky expensive items such as printer/copiers as part of a managed print service is also commonplace. The reason leasing is gaining traction is in large part down to the flexibility of payment options.
As businesses and individuals come to appreciate the benefits of leasing options that exist in cloud services and managed print services, it makes perfect sense to extend that experience to other IT hardware, software and services. The financing options fall into the four subsets outlined below.
First is the Fair Market Value (FMV) lease. Here the finance company retains ownership of the technology. This model is preferred by businesses wanting a regular refresh cycle and is mainly used for hardware where the CAPEX for items can be prohibitively expensive. Another benefit of this type of financial product, is that the residual value investment assumed by the finance company can make the amount paid back during the primary term of the financing less than the actual cash price.
Moving from a CAPEX to an OPEX model means a business can retain capital to spend on other projects. Additionally, if the organisation does not own the hardware it means less on the balance sheet as a fixed asset, which depreciates and eventually has to be written off. Moving things off the balance sheet like this is particularly attractive for smaller companies.
Larger firms might prefer to buy outright believing that the total cost of ownership might be lower. For those firms, a finance lease or hire purchase model might be the preferred option. A finance lease allows usage of the equipment for a period then the option to purchase at the end of the lease. This provides flexibility. Hire purchase is where a customer makes regular payments for a certain term on the understanding at the outset that they will own the equipment when all minimum payments are made.
The final model is a straightforward loan. Loans allow organisations to make fixed payments over time, but anything acquired with the loaned cash is an asset from the get go. Loans are the preferred model to spread payments over time for items like software and services.
Each model will have slightly different economics, and each one is suited more to certain situations. The best thing to do is consult with the finance specialist. But simply being aware of the options at the outset is a great place to start.
There is a general lack of understanding and awareness of financing solutions. Part of the financing challenge stems from the fact most financing conversations go through the IT buyer and not the Finance Director. The IT buyer speaks with technical sales representatives; together they plan out their technical requirements. However the decision on how to pay for your purchase should be more a finance to finance conversation.
Leasing can be much more cost effective than owning outright. With larger upfront and maintenance costs, the “own it outright” path leads to a “buy it now, fix it forever” situation whereas a refresh at three years dramatically reduces upfront and on-going costs. Furthermore, the refresh enables a business to take advantage of the gains available with the latest technology evolutions. In a situation where one business has a three year head start over another with the latest technology, there is only ever going to be one winner.
The same is also true, but to an even greater extent, for larger pieces of hardware. According to IDC x86 servers managed through refresh leasing can cost 32 percent less than servers that are purchased outright.
A final objection to financing is that it adds yet another layer of complexity to the process at the final hurdle. When the technical details have been decided upon and the finer details of the financing have been agreed, the financing firm needs to carry out a background credit check and have the paperwork processed which can add on precious days to the whole process. But that does not have to always be the case. At Dell Financial Services an online tool, Financing Connect, has streamlined the entire process. Financing Connect can provide buyers with real time leasing quotes and online credit applications and decisions in a matter of minutes. This can be done whilst you are on the phone, and if you wish to proceed the documentation is also drawn up quickly via the online tool and sent to you for signing. This reduces the time for approval from days to minutes.
With so many options for finance on the market the IT manager is faced with a bewildering choice. In truth it is unlikely that finance and IT professionals will ever talk exactly the same language, but with easy-to-understand financing models, they can be on the same page. The key to successful financing is to start thinking about it early in the process rather than selecting the technology you want, then worrying about how to pay for it afterwards.
Jim Findlay is regional sales manager at Dell Financial Services
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