Paying For It

Monday May 1st 2000 by SmallBusinessComputing Staff
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Options For Financing Copmuter PurchasesSo where to get the moolah? Bank loans have always been one traditional means of funding office equipment, but given the pace at which technology changes, an increasing number of businesses are turning to leasing as a hedge against obsolescence. Leasing also generally offers more flexibility than buying in terms of structuring monthly payments. Some leasing companies, for example, will allow seasonal businesses to make differential payments during various months of the year.

by Steve Bennett & Stacy Miller

Options For Financing Copmuter Purchases
So where to get the moolah? Bank loans have always been one traditional means of funding office equipment, but given the pace at which technology changes, an increasing number of businesses are turning to leasing as a hedge against obsolescence. Leasing also generally offers more flexibility than buying in terms of structuring monthly payments. Some leasing companies, for example, will allow seasonal businesses to make differential payments during various months of the year.

Beyond these traditional routes, some small businesses are also turning to the Web for financing options. A number of innovative financial "dot-coms" offer cutting-edge alternatives to the traditional path of acquiring, or gaining access to, technology. The best of these sites target those who are still in the process of deciding how to finance their purchases and provide guideposts for moving forward.

In this article we look at some of those options that warrant investigation for companies whose total outlay will be $100,000 or greater. Caveat: Your accountant or controller should definitely be involved in deciding which financing option is most appropriate. The choice should be made keeping both accounting and strategic factors in mind.

Options, Options, Options
Want to own and keep equipment for a number of years? A short-term loan of some sort might be the best bet. Otherwise, leases can often be more attractive than bank loans in terms of interest rates and flexibility. They're also generally easier to get than bank loans, the equipment and liability may not readily show up on the books, and the rent will be an operating expense, depending on the type of lease. You can often add equipment mid term, plus, at the end of the term, disposing of obsolete technology won't be a problem. Just call and they'll pick it up.

Want to rent to own? Look into a "finance lease," which is very much like an installment loan. Make a series of payments and in the end you own the equipment. For tax purposes, you technically own the equipment throughout the term of the lease, and you take the depreciation. If you know you'll be upgrading as soon as the lease is done, check out an "operating" or fair-market value lease, which should offer the opportunity to return equipment, purchase it at fair market value, or renew the lease in some fashion.

Again, the choice of lease has significant tax implications, and an accountant should weigh in on what's most appropriate. If you do decide to lease, the next decision is who to get it from. Figure out which leasing company will be the most flexible and tailor the financing to your company's needs, and which one will provide the most comprehensive services.

The reason for an in-depth analysis of vendors is that, today, leasing isn't just a formality. While computers might be commodities in some respects, in a business environment, they are part of computer systems that quickly become complex investments with many variables. Choose a leasing company that understands how the equipment functions, knows how it integrates with your business, and can provide consultative services as well as hard cash.

That's exactly what one small leasing company, Southbridge Financial Corp., provides for its clients. Arthur Freierman, president and founder of Southbridge, prides himself on being something of a computer aficionado who knows his way around the world of networking gear. "Usually clients get involved with me directly," says Freierman. "If they don't already have tight specs, we will sometimes help them with the design of a system and the selection of software, and then help source it for them." According to Freierman, those kinds of value adds can be extremely important to small businesses, especially those that don't have formal IT departments."

What Else Is Out there?
Along with the explosion of new technology solutions tailored for small business, both major hardware manufacturers and new Internet businesses are concocting new ways to help them pay for it. For David Grife, president of LeaseAdvisor.com, a wholly owned subsidiary of UniCapital, providing leasing service means more than just pushing equipment ­ he wants to help his customers make leasing part of their strategic planning process.

"We wanted to use the power of the Internet to help people learn which options for financing equipment best fit their company's needs. LeaseAdvisor.com lets you enter information about your business, and then walks you through the process of assessing your needs and current and projected finances. When you're done, you walk away with a roadmap that shows you a lot about where your business can go."

The LeaseAdvisor.com site sports three models to fiddle with: break-even analysis, financing options, and a six-month revenue planner. (The revenue planner is also downloadable as a standalone utility.) Assuming that leasing is the best option, apply for a lease on line (minimum: $10,000). First, you'll see a preview, which shows you what kind of information you'll need to have at your fingertips (credit references, bank references, etc.). Once you gather your information and fill out the actual form, the application goes directly to a service center for processing. Approval can be as quick as 30 minutes for some applications, but closer to 24 hours for others. They will accept online applications for financing up to $100,000. For higher levels of financing, you'll need to supply full financial records (bank statements for two years, tax returns, certification from an accountant, etc.).

While LeaseAdvisor.com has relationships with selected vendors and can sometimes negotiate a better price, you're free to purchase from any source you like (LeaseAdvisor.com pays the vendor directly). Even if you choose not to apply for a lease on the first visit, their learning tools are an excellent way to sort out the options and present them to your accounting people.

Some major computer makers are now making it more appealing than ever to acquire equipment through their business financing divisions over the Internet. Take Gateway: It offers standard leases with leasing lingo such as the fair market value, the 10-percent option, and dollar buyout. The company's "Tech Refresh For Business" program enables a small business to get the latest technology periodically without having to renegotiate the lease. According to Tony Montemurro, Gateway's senior manager for business financing, "The idea is to keep monthly payments the same and let you gradually refresh to the latest technology." Here's how the Tech Refresh for Business program works. Sign a 36-month lease, and get the option to upgrade laptops at 18 months and desktops at 24 months. If you lease a server, which requires a 48-month lease, you could refresh at month 36. When you refresh, you're effectively ending the old lease and starting a new 36-month lease (or 48 month, in the case of servers).

If you decide to refresh, Gateway sends a new model, and instructions for shipping back the CPU (or the entire unit, in the case of a laptop). You have 30 days upon receiving the new unit to ship the old one back. Gateway pays the shipping costs. Monitors can be refreshed after four years, but printers and other peripherals don't qualify for the refresh program. Add-in boards and anything else included with the original CPU will also be refreshed. Anything added to the machines won't. In fact, you're asked to remove any extras installed before sending the machines back to Gateway.

What kind of replacement do you get? That depends on the computer you're refreshing. The refresh is based on comparable technology in the product class you've financed, which keeps the monthly payment the same.

So is Tech Refresh for everyone? No. You pay a premium for the refresh option, depending on the product you plan to finance. According to Montemurro, the typical profile of someone who's going to opt for Gateway's Tech Refresh is someone who's concerned about obsolescence and wants to make payments flexible and predictable. "This is not for someone who wants to keep their options open to own the equipment at the end," he says. "A standard lease with no refresh option is more suitable for someone who's not sure whether or not they want to eventually own the equipment."

The Virtual IT Department
Imagine offloading your entire computing infrastructure to a third party that provides whatever computing equipment you need, then supports the gear directly via the Web. Just pay a monthly service fee and never worry about obsolescence. As you outgrow equipment, the third party eliminates the hassle of disposing of it, and replaces the old machines with new gear that meets your current needs.

If the concept of a single point of responsibility sounds appealing, then CenterBeam.com might be the right financial solution for the next time you need an injection of new technology. CenterBeam is a turnkey IT solution provider. "Think of it as a utility," CenterBeam chairman and CEO Sheldon Laube comments. "Just like you pay your monthly utility bill, you pay your monthly IT service bill. We take care of the rest."

True, you won't have any equity in the equipment. But you also don't have the hassle of sourcing the various components, ensuring compatibility, executing upgrades, carrying out maintenance, and dealing with all the other nitty-gritty tasks related to computing systems.

CenterBeam works exclusively with Dell systems running Windows 2000. Dell ships the gear directly to you, and CenterBeam provides plug-and-play networking. From its remote location, CenterBeam automatically runs diagnostics on the machines and upgrades software and firmware in the background. Another plus is that CenterBeam backs up every machine every day, eliminating the need to force people to adopt safe computing behaviors. If a machine goes down, CenterBeam will replace it the next day. (One caveat: you cannot open the boxes. If you have sophisticated do-it-yourself upgraders and tinkers in your organization, take that restriction into account.)

So what will this outsourced approach to IT cost you? About $200 per month per machine. Now, you might balk and note that you can pick up perfectly serviceable machines for $1,200 or less. Why shell out double the amount?

The answer has to do with the real cost of the machines, called the Total Cost of Ownership or "TCO." Estimates range from $5,000 to $10,000 per machine per year in a business setting, when you factor in software, training, maintenance, and IT management costs. In that context, the CenterBeam approach represents significant savings ­ especially if you can put a price tag on intangibles such as grief, anxiety, and frustration.

One key to the CenterBeam approach is its flexibility, and its willingness to understand and accommodate your needs. CenterBeam helps your company determine an appropriate lifecycle and replacement schedule, which varies from business to business. Someone who does intensive graphics work might need the fastest product available, which means procuring a new computer every 12 months. Others doing basic word processing or order entry tasks might need a machine that can last four years. The key is to base lifecycle on the specific needs of your business.

As you can see, creative financing options abound for your next computer system acquisition. What's the best option? Only your accountant knows for sure.

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