Spending on IT products and services in Australia is expected to reach A$93 billion in 2019, according to technology research firm Gartner. Nearly every business will need a healthy IT budget in order to remain competitive. However, many businesses don’t have enough cash on hand for such sizeable investments. Fortunately, cash is not the only way to embark on these important IT projects.
We know that the alternative to funding an IT project outright – financing – can seem unappealing for firms that don’t want to take on high levels of debt. Despite these 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 digitised and technology-driven world. Companies should consider the reasons to finance, types of financing available and key considerations in choosing a financing option as they make their decision.
Main reasons to finance IT projects
As we listed above, the biggest obstacle to implementing IT projects is often the budget. New technology can be one of the largest investments a company makes. While the payoff – whether through revenue improvements or cost savings – is expected to outweigh this investment, it’s still a difficult decision for many companies. Financing the transaction can make this decision easier on the company, and it can lower the hurdles that many companies have to overcome in order to remain competitive.
In our opinion, the two main reasons to finance are:
- Improved cash flow: When companies choose to finance, they may have a small (or no) payment up front and then a set of monthly payments over the financing term. This enables companies to preserve their cash flow, rather than depleting their cash balances with a large initial purchase.
- Potential tax benefits: Depending on the type of financing a company chooses, it may be eligible for some tax benefits. Interest or repayments on some loans are tax deductible. In general, an IT project can be classified as a capital expense. With these long-term investments, often the depreciation of the asset can be deducted. Note, if the project is a website, there are different taxation rules for what can be claimed as a deduction.
Different types of financing
There are multiple types of financing to consider, depending on the company’s IT project. The main difference between these options is whether a company wants to own or just use an asset. Some of the types of financing also have minimum loan amounts.
- Operating lease: The company makes regular payments over the financing term to use the asset but does not own it.
- Commercial hire purchase: Companies can gradually purchase the asset over time through periodic repayments.
- Specific security agreement: This option is similar to obtaining a mortgage on a house, but the company is purchasing an asset other than a house.
- Revolving limit: With this type of financing, a company receives an approved credit limit that it can use to acquire assets over a certain time.
- Rental agreement: Renting equipment allows companies to stay up to date on technological development without having to constantly purchase new assets.
Important considerations in financing a project
We’ve financed many projects in our history. We recognise that every company is different, but our experience has helped us identify five main considerations when looking to finance an IT project.
- Rates: Interest rates are essentially the “fee” the company will have to pay for the 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 should also consider how much they will end up paying in interest over the term of the loan. Getting an attractive rate makes sound business sense. Often banks provide better rates than finance companies.
- Term: There are a variety of financing terms available, often ranging from one to five years. Companies should choose the term that best suits their needs and cash flow. Longer terms will typically include lower monthly payments, whereas shorter terms will have higher monthly repayments.
- Conditions: Each financing agreement will be different. It will depend on the lender’s capabilities and the borrower’s needs. For example, the financing agreement can stipulate how the company can use the funds. Some may only allow the funds to be used for hardware, whereas others will include software and labour. Banks that partner with IT companies, for example, typically allow these companies to finance software and labour expenses along with the hardware.
- Approval process: Companies should be able to get approval quickly and easily, since delaying an IT project could cause companies to lag their competitors for even longer. With Greenlight, companies only have to fill out a simple, one-page form and will receive a 24-hour turnaround with no directors guarantees. Another option that can speed up the approval process is to 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 of the 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 the term if the product has been useful and does not require many additional upgrades.
To finance or not to finance?
We know that investing in an IT project is a major strategic decision for a company. As the company goes about its cost and benefit analysis, it must consider different types of financing and the key considerations for each option. No matter which financing option they choose, financing can be a great way for a company to realise tax benefits and better manage their cash flow.
Working with banks, especially those that have relationships with IT companies, may be the best option for many companies. These banks can typically offer more attractive rates and better financing conditions that can help companies no matter what kind of IT project they are trying to finance.