There is no denying that ICT is business-critical in the fast-paced and increasingly connected society we live in today – however, procurement of the needed solutions and equipment too often still becomes a negotiation over cost and demonstrating value.
That is, until the channel explores asset financing options.
“Keeping up with the latest technology often means that businesses are budgeting for new purchases each year to continuously refresh their infrastructure – and with this, taking a financial knock on the depreciated asset value of the outdated equipment. At least that has been the case up until now,” says Mike Murray, director: technology asset finance at Merchant West, which specialises in customised asset financing solutions.
“New approaches to asset financing, such as an operating lease on hardware and software components for instance, enables the business to implement their communications and IT infrastructure refresh project, but without purchasing the equipment. This model keeps these depreciating assets off the client’s books – while the supplier is able to offer their clients fully financed end-to-end solutions they can bank on.”
Niche asset finance companies, like Merchant West, will only be successful and be able to provide the solutions mentioned if they are able to raise their own capital, host their own sales, credit-checking and legal teams in-house – offering faster approvals and turnaround times. Such companies will thereby provide an end-to-end and integrated solution themselves that can be tailored to the needs of communications and IT supplier companies and big or small businesses, alike.
“We expect that the operating lease model, across hardware and software, in this regard will see significant traction in 2017 – particularly as most businesses are keeping a tight grip on their budget purse strings in today’s sluggish economic climate – and availability of credit is fast becoming rare with our country’s credit rating,” says Murray.
“Up until now, the challenge has been that the IT supplier channel themselves, have not been very familiar with selling end-to-end solutions on an operating lease. However, communications and IT companies are more frequently finding that the traditional financiers have waning appetite to play in this space – mainly because most banks don’t specialise in the operating lease model whilst at the same time not understanding the nuances of the IT assets.
“Added to this, the banks often only see the potential risk to themselves in terms of the accelerated rate physical computer equipment depreciates and the intangible nature of software. This then opens immense opportunities for asset finance specialists like ourselves,” he adds.
Similarly, to a standard IT service level agreement (SLA), the managed operating lease becomes a contract between the client business and their chosen IT supplier – the itemisation and costing of this contract will be determined by what the business requirements are and that the two parties agree on. Like most SLAs, this may include the sourcing and installation of any required products that will drive the office automation and telecommunications – from hardware and security technology, to software, software updates, implementation and licences.
The fundamental difference on an operating lease agreement is that the client’s business doesn’t have to drain their capex to purchase equipment and software that will quickly become outdated within the next cycle.
“With leasing IT equipment, what would have been a capital expense becomes an operational cost – one that can offer a potential tax benefit to the client’s business. Reduced payments, when taking into account potential future value of the assets, can be arranged taking into account each assets useful life – making sourcing new equipment or a complete IT refresh more accessible to big and small businesses, alike, who otherwise may not have large chunks of capital to dip into for this kind of business re-investment,” says Murray.
As a “pay for use” model, the risk of depreciating value of the equipment is removed from the business – the user only pays for a portion of the equipment value, reducing total cost of ownership, and it becomes the asset financier’s responsibility to dispose of the equipment after the specified period and recover any residual value from obsolete equipment.
“What suppliers and businesses really need is a trusted partner who specialises in understanding and providing flexible, end-to-end and hassle free asset finance options, with quick turnaround times, to accommodate the ever changing demands of business. And, asset finance on this basis is a model that the business heads of IT and finance will both be able to agree on,” concludes Murray.