A lease is more

Imagine a world in which a £10,000 system could be bought for an upfront cost of £350, where customers could upgrade and extend their systems for a few pounds a month and the original reseller was guaranteed the full value of the sale.

Imagine a world where resellers received the full price of every system within a week of delivery and the paperwork, and even some selling, was done free of charge by a third party offering commission on the sale, where poverty was unknown, cancer was curable, and England won football matches.

Setting aside the impossible, these benefits are already on offer, through the simple expedient of encouraging customers to lease their systems instead of buying them.

Cashflow is a key benefit, according to Mark Picken, sales director at First National Business Equipment Leasing. "The main reason resellers use leasing is because they get paid," he says.

Instead of waiting 30 to 60 days for invoices to clear, resellers can expect to be paid in full within five to seven days, as long as the reseller organised the lease, and the customer signs off the installation.

There is also less credit risk. Fraud, for example, is much less common in leasing deals than on credit card payments, because lessors carry out checks on a company's credit-worthiness. And because it gets paid quickly, the reseller's own credit status with its distributors is improved.

The attractions
Spreading payments have several sales advantages, as well as genuine financial attractions for the customer. As anyone who has ever bought on credit knows, £350 a month for three years sounds a lot less painful than £10,000 down, and buyers of IT systems feel the same way.

Leasing customers are more likely to acquire the whole system straightaway, rather than cutting down their requirement or buying in phases (with the reseller risking losing subsequent phases to rivals). If finance is arranged up front, there is less likelihood of the customer deciding it can no longer afford the system and backing out. And it is harder for it to plead poverty to get discounts.

Nigel Bolt, UK and Ireland director of Leasetec, which provides branded services for vendors such as Cisco and StorageTek, says: "Leasing takes away a lot of the pressures of discounting. If resellers turn a capital expenditure into a revenue expenditure, they won't need to give away so much."

Prompt authorisation by the lessor is essential, and resellers usually expect leases to be authorised within 24 hours, a feat now achievable thanks to online credit-reference checking, says Paul Bryce, sales manager at IBM reseller Campbell Lee Computer Services.

"I phoned IBM global financing for £100,000 credit for a customer and received a call the next day to say it had been accepted," he says.

Counting the pennies
Smaller leases can be fixed on the spot, thanks to new self-service websites. IBM, in partnership with Heller Global Finance, has just launched SuccessLease, which aims to let IBM partners set up leases for smaller companies within an hour.

Customers use leasing partly for financial reasons, to save capital and to keep costs constant. A company with a good credit rating could pay about £350 a month for a £10,000 system, which works out to be eight per cent a year for a three-year lease.

Add in the tax benefits and this can be quite cost-effective for the average debt-financed business. It also represents an additional source of credit for the customer.

Flexible leases are becoming more common, with payment 'holidays' to tide customers over periods where cashflow is tight, low-start payments that grow as the lease progresses, and all-in pay-per-seat deals. Leasing supports the trend towards taking IT costs off the balance sheet.

Peter Millard, sales director of broker Wyse Leasing, says: "Companies increasingly like to feel that their IT solution is built around an operating cost, and keep this as constant as they can."

Because accountants dislike owning depreciating or obsolete assets, the idea of leasing for three years and then replacing the system is very attractive. Even customers that planned to buy the system at the end of the lease often do not bother when the three years are up.

Increasingly, they do not even wait for the end of the contract. Most leases have built-in options for upgrading or adding extra equipment - known as technology refresh - and up to three-quarters of customers take them up. Millard says that, after 18 to 24 months of a three-year contract, many customers change 40 to 65 per cent of their installation.

Simon Garrett, sales director of Unix reseller Peritech Systems, reveals that technology refresh gives canny resellers a captive customer base, as well as offering customers an added incentive to lease.

"These lock-ins give us the potential to write even more business in subsequent years," he says. "The customer's overhead remains fixed for the period of the lease, but their performance is increased. That's a powerful tool for achieving customer satisfaction, and makes it much easier for us to sell."

Tax-deductible
There are tax benefits for customers, too. Unlike capital purchases, leasing payments are fully tax-deductible in the year they are paid. And if the customer is not planning to own the equipment at the end of the lease, VAT is only paid on the lease payments, not up front on the total system cost.

However, many smaller businesses do not understand the tax advantages, especially if they have no in-house accountant, so it is often up to the reseller to point them out.

Some leasing companies pay commission to resellers. This can be as much as 10 per cent, although three per cent is more common. But many lessors either do not pay commission or advise against it; commission adds to the administrative complexity of the deal, and it has to be added to the price of the system, making the overall price less attractive.

Garrett is not a big supporter of commissions. "The customer ends up paying one way or the other. Instead, I would offer a better price and be sure of getting the business. Our money is made in the equipment and service, not hidden away in extra charges," he says.

Until the mid-1990s, leasing was mostly hardware-biased. But now software and services, including training, consultancy and support, increasingly are built into leases. This not only allows the customer to pay a single price for its whole system, but also saves the reseller from having to persuade the customer to renew support and maintenance contracts annually.

There has been a similar widening in the kind of businesses that lease. Ivor Coleman, European communications manager for IBM global financing, says: "Leasing used to be associated with big companies and big hardware. Now it has gone right through the market, from SMEs to large enterprises. We reckon about half the leasing we do is to corporates and the other half to SMEs."

All kinds of businesses use leasing, but it is more popular with banking and finance companies that favour off-balance-sheet assets; service and outsourcing companies, including application service providers, which receive their turnover in instalments and like to pay the same way; the public sector, because of private finance initiatives and shortage of capital; and pharmaceutical companies, because of tax advantages in leasing for research and development.

Smaller companies and startups also like to lease because they lack capital. But the high failure rate among small firms discourages many of the bigger lessors, or obliges them to charge much higher rates, typically 16 per cent per annum instead of the eight per cent charged to more credit-worthy customers.

Missing the point
Despite the advantages that leasing has to offer, many resellers are still ignorant of its benefits or reluctant to share in them.

Sean Williams, managing director of specialist IT leasing firm Systems Capital (Syscap), estimates that at least two-thirds of IT leases are arranged by the customer, not the reseller.

He believes that, although most resellers will arrange leasing finance if asked, only about a quarter actively encourage customers to lease. And most of these are solutions providers rather than box-shifters.

Enlightened resellers such as Campbell Lee realise they must take the initiative. "Every proposal I put out has the leasing quotation first, and if the customer wants a cash price, I will come back to them with it," says Bryce.

"Many IT managers do not understand leasing, so you really have to explain it to them. You can't rely on them to ask you for it. It is always worth speaking to the finance department and suggesting leasing. If you start talking about leasing and take a leasing salesman with you, you can get access to the finance director."

Specialist IT leasing companies and brokers often work with resellers on the deal, not only setting up the lease but assisting in the actual sale. Garrett says: "I am happy to send the leasing company over to our customers to represent us in that part of the deal. It is an added resource for the overall sale."

Leasing is sometimes 'sold' to the reseller's own salesforce, according to Micah Thompson, European programme manager for SuccessLease at Heller Global Finance.

"The initiative stems from the reseller's finance director," he says. "If they see the key benefits, we can move it out to the sales staff. It takes a while to get going, but once you get one or two successes on board and they realise we are not just trying to sell finance, the sales staff start to use leasing proactively."

Salespeople need proper training, says Bolt. "There can be quite an education gap, and a lot of issues may need to be explained to the customer," he says.

Resellers do not always understand either, warns Bolt. "Resellers tend to see leasing as a way to get around a problem. For example, if a customer says at the last minute that it cannot afford a system, the reseller will then say, 'OK, you can lease it instead'. That can get the reseller into trouble."

Look before you leap
Most resellers work predominantly with one or two leasing companies, with perhaps a broker to handle awkward deals. There are some sharks out there, so resellers should look for reputable companies, such as members of the Finance and Leasing Association.

Vendors' leasing arms, and other lessors which specialise in IT, tend to be more sympathetic to resellers than general finance houses. They are keener to establish partnerships and get involved in selling. They often handle asset management, and can arrange disposal of hardware at the end of the lease. And they are better at calculating residual values, which can reduce the monthly cost to the customer.

Studies for IBM by Bloor Research suggest that there is an 18 per cent increase in the likelihood of companies using leasing to finance IT purchases during the next two years, almost double the general rate of growth of the IT market. The signs are there for resellers: those that do not offer leasing as a standard option could lose out.

Key points

• Leasing is gaining popularity with companies of all sizes, and for entire systems, not just the hardware.
• Reseller benefits include prompt payment, customer lock-in through upgrade options, assistance in selling from the lessor and less pressure to offer discounts.
• Customer benefits include reduced capital spending, predictable fixed costs, tax advantages and the ability to upgrade technology for a small monthly cost.
• Leases can be authorised quickly, often within hours, thanks to online systems.
• The full potential of leasing is still not being realised. Resellers need to be more proactive, offering leasing up front and explaining the concept to customers.