Natural laws of leasing

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“Millions ‘wasted’ each year as Irish IT budgets soar”. That was the eye-grabbing headline that heralded a press announcement from AIBIT, the financing solution from AIB Corporate Banking, in November last year.

The company went on to suggest that Irish companies were spending anywhere from 10 to 25 per cent more than necessary on IT and argued growing IT budgets could be reigned in through IT leasing, saving the Irish economy millions of euro each year.

Not surprisingly, it generated quite a bit of interest and attention. AIBIT cited figures from the US which showed the IT equipment financing market had grown to be worth $40 billion a year, the value of the market surging by two-thirds over three years. AIBIT said it had “seen healthy growth in IT leasing, matching the trend throughout Europe”.

Mission statement 

AIBIT was launched in 2005 and the solution is open to companies and public sector organisations that are planning IT upgrades over the next few years. AIBIT’s core message is that it allows firms to acquire state-of-the-art technology, without tying up large amounts of capital.

“We went into the market based on customer feedback when we launched in January 2005,” says Valerie O’Keeffe, senior manager at AIB. “We did it to service a market need that was there. Customers wanted other options in relation to financing.”

Any IT-related can be financed through AIBIT, including PCs, printers, servers, storage, and data networking infrastructure. At the end of the lease term, customers have a variety of options, ranging from the purchase of the leased equipment, a new lease agreement, or an extension on the term of the existing lease.

Business benefits

O’Keeffe describes some of the benefits of leasing. “Instead of buying the asset where you pay the cash and it’s gone, you can spread the cost over a term. Customers are paying as they use the technology, they’re treating it almost as a utility. The benefits are you get a fixed rate, certainty regarding your repayments and there are tax advantages.”

AIBIT is also able to offer flexibility in terms of repayment, according to O’Keeffe: “ We also have flexibility in relation to payments – they can be monthly, quarterly, even half yearly.”

Although there is an APR on the payments, it is possible to pay less for an asset in a leasing contract than you would if you bought it for cash. AIBIT claims that because it incorporates residual investment in IT assets i.e. the value of the equipment at the end of the lease, a business can rent some categories of assets for less than it would cost to purchase outright with cash. This is because the residual value can be more than the interest paid over the three years of the lease.

“You pay an APR but technically you can achieve zero per cent because you’re getting the residual value of the product. The interest rate is built into the structure, so it depends how you look at the residual,” says Cathal O’Connor, senior product manager, AIB Corporate Banking Ireland.

Number of options

AIBIT says it offers all kinds of options tailored to customers’ needs. For example, AIB could purchase a product and lease it back to the company on a finance lease for a fixed rental over a chosen term. In addition, the lease rental can be written off against the company’s taxable profits. Businesses also have the option to take out an operating lease which incorporates a third party agreeing to buy back the asset at the end of the term at an agreed price.

At the end of the term of the lease, customers have three different options. According to O’Keeffe, “a lot of customers invest with the view to reinvesting three or four years down the line – they want to hand back the assets and get new ones”. Demonstrating the flexibility of AIBIT, she says it is sometimes able to give such customers the residual value of the equipment back at the beginning of the lease rather than at the end.

There may be some customers who just want to hand back the asset and go somewhere else and there could be others who would like to buy it for fair market value.

O’Keeffe says a big advantage of leasing is that there is no lock-in with a particular vendor or supplier. “Customers can go out and tender and get the best deal they want,” she claims.

Minimised cost

A final benefit arises from the consequences of the WEEE directive. If a company bought an IT asset, it would have to negotiate take-back of the equipment with the vendor when it came time to replace it and pay for it. Things are easier with leasing.

“When it comes to the WEEE requirements, we’ve minimised the cost of disposal,” says O’Connor. “We take an element of the headache away. It works particularly well where companies are looking at multiple vendors and different suppliers. You only take the headache on if you buy the equipment at the end of the lease.”

Read More: Hardware & Equipment