As the ’90s came to a close, Montreal-based Aldo Group Inc. was looking to expand its shoe retail business. But to do that, it had to get its computers out of the ’80s. “We had these old mid-80s legacy systems,” says Aldo VP of finance Bob Raven. “For the kind of merchandising network we wanted to create, we knew we needed an upgrade.”
Before Aldo settled on what technology to acquire, it weighed the payment options. Buying outright could empty the coffers and saddle the company with expensive goods growing obsolete by the day. Bank financing would leave the coffers undisturbed, but that still led to ownership of out-of-date computers.
Eventually, the company opted to lease directly from a vendor. “Leasing is easier on the books,” explains Raven. “Rather than calculating depreciation and not seeing the full value of your initial expenditure deducted for four years, leasing payments are deducted as expenses.”
In the end Aldo chose IBM Global Financing because the lessor was willing to finance software in addition to leasing hardware. “It’s very difficult to get a bank to finance an application, something that you can’t pin a value to,” says Raven. “With a vendor like IBM, it’s their core competency, so they know how to finance it.” For Raven and Aldo, the shoe fit.
For the rest of us, making that final decision can be a struggle. “Every time you turn around there is a system better, smarter, faster and prettier than the one you just purchased,” says David Powell, president of the Canadian Finance and Leasing Association. “On top of deciding what tech you need, you have to figure out if you should buy, borrow, lease or find another way to get what you need.”
To help you wade through the acquisition options, here is a PROFIT primer on tech financing options:
Fair market value (FMV) leasing
This is the most common option offered by most leasing companies. In exchange for relatively low monthly payments, you face a larger purchase price at the end of the term. For instance, after 36 months of payments, a $25,000 lease (the smallest lease offered by IBM) might have a $5,000 buyout. The advantages of FMV are most pronounced for bleeding-edge businesses that need to stay on top of the technology curve, says Belinda Tang, general manager for IBM Global Financing in Canada. “You get the newest technology,” she says, “without tying up your money in out-of-date hardware.”
Lease-to-buy (LTB)
In terms of monthly payments, LTB is more expensive than a standard lease because the buyout option at the end of the term is considerably smaller — think $1 versus, say, $5,000. It is the option of choice if your current technology is obsolete but you don’t expect your needs will change again for some time. And at the end of the lease you own the equipment, which means you can leverage the hardware in non-traditional ways. “Some employers like to let their employees buy the computers off them at a reduced rate,” says Tang. “It’s a great way to turn an aging asset into a reward.”
Call the BDC
Because the Business Development Bank of Canada’s mandate is to help establish and grow Canadian SMEs, it offers long-term loans — up to five years — for tech purchases. This allows you to spread out the payments and reduce cash-flow pressure, says Michel Leduc, Toronto-area BDC vice-president. Two things set BDC apart from the usual banking suspects. First, the loans have a non-demand guarantee, which means as long as you make the monthly payment, the BDC can’t call your loan. Second, in a cash crunch, you can defer payments on the principal. “You have to pay the interest,” explains Leduc, “but you can put off paying the principal for two or three months until your cash flow corrects itself.”
Lease, buy, borrow, steal? Confused by the options? An online tool can help you make a decision specific to your circumstances. The “lease or buy calculator”, found under “financing” at Industry Canada’s Strategis website (http://strategis.ic.gc.ca) compares the cost of leasing to the cost of buying, factoring in the tax implications and the time value of money.
Maximize your assets
If you’re going to upgrade your technology, then consider selling your old computers for cash. They might not be as worthless as you think. IBM Global Financing, for example, also has an asset-recovery business. “We can help companies with their older equipment by either taking it off their hands or giving it an upgrade,” says Tang. At the very least, selling your old computers and printers can go towards paying your new lease. And if your junk really is junk, then IBM can ensure it’s disposed of in an environmentally friendly manner.
Consider used equipment
Most lessors have a treasure trove of pre-owned equipment available for lease, too. Obsolescence, says Powell, is in the eye of the beholder. “Banks keep their equipment top of the line, so they are constantly refreshing,” says Powell. “That means the equipment they move along to the vendors and lessors is still more than most of us need.”
Find an alternative
Finally, don’t forget that there are alternative financing solutions that you can apply to all your cash-flow needs, including asset-based financing, purchase-order financing and factoring, says Timothy Pompeo, president of Infinity Corporate Capital, a Toronto financing consultancy.
Asset-based financing allows a business to use its assets as collateral to help finance loans, while purchase-order financing allows the lessor to evaluate the business’s confirmed sales and fund against them. Both are useful for startups in a financial pinch, but both involve carrying debt.
Perhaps that’s why factoring — the selling of your business’s invoices for cash, versus waiting to be paid by your client — is growing in popularity. “When you take out a line of credit or a loan from a bank, you’re creating debt,” says Pompeo. “With factoring, you’re only losing about 4% of your invoice. Many companies offer a discount to a client for early payment of invoices, so this is just a quicker version of that.”
© 2004 Paul Jay
