Asset based IT finance

Millennia Blog - straightjacket

Despite ever increasing profits the banks are still not lending to small businesses. That is the claim made this week as yet another bank revealed burgeoning profits while UK businesses continued to struggle. Although moves are being made to increase the money supply by banks, this could be affected by an interest rate rise sooner rather than later, as real inflation tops 5% and producer input inflation flies into double figures, mainly due to ramping fuel and commodity prices.

So companies looking to invest in IT have the hard choice of either chasing limited funds at rates orders of magnitude above the Bank of England base lending rate, or raiding their cash reserves – something many are unwilling to do at times of economic uncertainty.

However in the 21st Century standing still is also not an option as companies need to maintain a competitive edge, so maintaining an efficient IT infrastructure is as important as ever. Therefore in looking to maintain investment without large capital outlay companies are once again looking towards the traditional asset based finance structures of leasing to be able to deliver their IT projects.

During the better times of the last decade we saw a move away from leasing and a preference for companies to commit to a spend according to an annual budget. Budgets are now much tighter and therefore more companies are once again looking to spread this cost across many years.

There are a number of good reasons for doing this beyond spreading the payment, not least in that leasing is more tax efficient than outright capital purchase in that 100% of the monthly payments can be claimed as an expense, whereas only a percentage of a capital purchase can be taken each year as depreciation, and 100% is only reached when the asset is written off the books as having no value.

It is not as expensive as many would consider either, with £10,000 of financing available for around £330 a month over 3 years depending on credit worthiness. These payments are fixed to prevent interest rate rise shocks in the future upsetting budgeting.

This provides businesses with the ability to budget IT projects and even build in an automatic IT refresh without having to consider the costs of disposal of out of date equipment – yet another regulatory worry for companies. This is particularly useful in 5 year purchase cycles, keeping the monthly costs down and allowing equipment to be refreshed without budgeting for another large capital spend.

We are now seeing an increased interest in leasing core IT infrastructure as a way to smooth out the financial issues with investing in IT, and expect this trend to continue. If you have a IT project you think could benefit from a smoothing out of finances, then drop us a line at [email protected] and we will get back to you to talk in more detail on how we might help.