Vendor financing has its advantages

Ed Mugford is sold on leasing his company’s computers and has been since 1996. It is just that now he is a little more particular who he leases from.

As the manager of IT for HB Group Insurance Ltd., the Mississauga, Ont.-based subsidiary of The Co-operators General Insurance Company, Mugford was responsible for the management of the company’s 550 desktops. Unfortunately his existing relationship with a “well known” distributor had turned sour. “It became very, very problematic,” he said. There were continual staff changes, an ownership change, and no accountability for HB Group’s account.

In addition there were “exorbitant” additional charges added to the lease for such minor items as missing screws and faceplates.

HB Group looked at a variety of companies and finally settled with IBM Global Financing to help refresh the company’s desktops. IBM’s six-month payment deferral saved “considerable” money and the rollout was even handled ahead of schedule, Mugford said.

HB Group’s move to IBM, and specifically vendor financed leases or purchases, is part of a growing trend as more an more companies forego financial institutions for their IT monetary needs. In fact, even the banks are financing their leases through IBM instead of their own institutions.

Almost a third (31 per cent) of the US$35 billion in assets IBM Global Financing leases are with financial institutions, said Belinda Tang, vice-president and general manger of IBM Global Financing, IBM Canada Ltd. in Markham, Ont.

For Vito Mabrucco, none of this is too surprising. The group vice-president of products and services research with IDC Canada Ltd. in Toronto said IT vendors now have the upper hand when it comes to leasing and long-term purchasing deals. “The vendors can look at (potential) future sales whereas the financial institutions only look at the money,” he said.

The bank credit line is generally short term, Tang said, and does not lend itself to the long terms typically used when financing large IT projects, some of which span as much as 60 months. Mabrucco said financial institutions are not very good at understanding non-hardware loans when the product or service is ephemeral or non-palpable, and this makes it more difficult for them to associate a specific risk level with the loan. IT companies inherently understand these issues, he said.

Because of this, large IT vendors can often produce better lending rates, whether the solution in need is being purchased or leased.

A parallel can be found in the auto industry, where manufacturers usually have better lending rates than banks. Car dealers see buyers as recurrent customers and can defer some of the cost of low lending rates to future sales.

Tang said IBM’s size and reputation is another advantage, since it can leverage its corporate credit rating in the marketplace to additionally lower the cost of borrowing.

Thus, according to Tang, “a dollar of budget can get $3 of IT, if it is financed.” This also has the added advantage of allowing companies to deploy their cash reserves on investments with higher returns, she said.

Though the majority of IBM’s leased portfolio is IBM products, about 20 per cent are non-IBM, and theoretically a company could come to IBM to finance the purchase of a competitor’s product.

In May IBM added AD&SS (asset disposition and support services) to it offering. Companies can now go to IBM to get rid of old or outdated technologies.