Spending on ITproducts and services in Australia is expected to reach A$93billion in 2019, according to technology research firm Gartner. Nearlyevery business will need a healthy IT budget in order to remain competitive.However, many businesses don’t have enough cash on hand for such sizeableinvestments. Fortunately, cash is not the only way to embark on these importantIT projects.
We know that thealternative to funding an IT project outright – financing – can seemunappealing for firms that don’t want to take on high levels of debt. Despitethese concerns, as long as companies are smart in how they go about financing,this is a viable option for keeping up with IT demands in this highly digitisedand technology-driven world. Companies should consider the reasons to finance,types of financing available and key considerations in choosing a financingoption as they make their decision.
Main reasons to finance IT projects
As we listed above, thebiggest obstacle to implementing IT projects is often the budget. Newtechnology can be one of the largest investments a company makes. While thepayoff – whether through revenue improvements or cost savings – is expected tooutweigh this investment, it’s still a difficult decision for many companies.Financing the transaction can make this decision easier on the company, and itcan lower the hurdles that many companies have to overcome in order to remaincompetitive.
In our opinion, thetwo main reasons to finance are:
- Improved cash flow: When companies choose to finance, they may havea small (or no) payment up front and then a set of monthly payments over thefinancing term. This enables companies to preserve their cash flow, rather thandepleting their cash balances with a large initial purchase.
- Potential tax benefits: Depending on the type of financing a companychooses, it may be eligible for some tax benefits. Interest or repayments onsome loans are tax deductible. In general, an IT project can be classified as acapital expense. With these long-term investments, often the depreciation ofthe asset can be deducted. Note, if the project is a website, there aredifferent taxation rules for what can be claimed as a deduction.
Different types of financing
There are multipletypes of financing to consider, depending on the company’s IT project. The maindifference between these options is whether a company wants to own or just usean asset. Some of the types of financing also have minimum loan amounts.
- Operating lease: The company makes regular payments over thefinancing term to use the asset but does not own it.
- Commercial hire purchase: Companies can gradually purchase the asset overtime through periodic repayments.
- Specific security agreement: This option is similar to obtaining a mortgageon a house, but the company is purchasing an asset other than a house.
- Revolving limit: With this type of financing, a company receivesan approved credit limit that it can use to acquire assets over a certain time.
- Rental agreement: Renting equipment allows companies to stay upto date on technological development without having to constantly purchase newassets.
Important considerations in financing a project
We've financed many projectsin our history. We recognise that every company is different, but ourexperience has helped us identify five main considerations when looking tofinance an IT project.
- Rates: Interest rates are essentially the “fee” the company will have to pay forthe ability to finance a project. Rates can vary widely from lender to lender.While it’s tempting to go with the lowest monthly payment, companies shouldalso consider how much they will end up paying in interest over the term of theloan. Getting an attractive rate makes sound business sense. Often banksprovide better rates than finance companies.
- Term: There are a variety of financing terms available, often ranging from oneto five years. Companies should choose the term that best suits their needs andcash flow. Longer terms will typically include lower monthly payments, whereasshorter terms will have higher monthly repayments.
- Conditions: Each financing agreement will be different. It will depend on thelender’s capabilities and the borrower’s needs. For example, the financingagreement can stipulate how the company can use the funds. Some may only allowthe funds to be used for hardware, whereas others will include software andlabour. Banks that partner with IT companies, for example, typically allowthese companies to finance software and labour expenses along with thehardware.
- Approval process: Companies should be able to get approvalquickly and easily, since delaying an IT project could cause companies to lagtheir competitors for even longer. With Greenlight, companies only have to fillout a simple, one-page form and will receive a 24-hour turnaround with nodirectors guarantees. Another option that can speed up the approval process isto get preapproved finance and draw down on it over 12 months.
- End of term options: Depending on the type of financing procured,companies may be able to roll over the equipment and get new gear at the end ofthe financing term. This option will keep staff effective and efficient. Alternatively,companies may choose to buy the equipment for market value at the end of theterm if the product has been useful and does not require many additionalupgrades.
To finance or not to finance?
We know that investingin an IT project is a major strategic decision for a company. As the companygoes about its cost and benefit analysis, it must consider different types offinancing and the key considerations for each option. No matter which financingoption they choose, financing can be a great way for a company to realise taxbenefits and better manage their cash flow.
Working with banks,especially those that have relationships with IT companies, may be the bestoption for many companies. These banks can typically offer more attractiverates and better financing conditions that can help companies no matter whatkind of IT project they are trying to finance.