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Caveat emptor

Renting or financing IT assets can be an attractive alternative to cash expenditure, provided it`s done correctly.

BY  Samantha Perry , 1 May 20080 comments

Andy Tompkins, BCXAndy Tompkins, BCX

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The idea that IT assets, like cars, are depreciating assets that need to be updated regularly, and are thus not worth spending good solid cash on is starting to take hold in the local market. There has, unsurprisingly, been a concurrent surge in suppliers offering IT asset rental and financing options.

Companies looking to rent or finance IT assets would do well to bear in mind a few old adages. The first is that a company that has recently entered the market may, when times get tough again, exit the market. This is particularly relevant to companies that are offering rental financing options in addition to their core lines of business.

The second old adage is caveat emptor: let the buyer beware. There are many ways to skin a cat, and some companies like to put the means by which they earn their chunk of flesh into the small print, where it will not be noticed until the renter tries, for example, to terminate the deal early, at which time said fine print turns around and bites, hard!


Details, details

The devil's in the details, as they say (okay, I'll quit the clichés now), and there are a number of devils that prospective renters would do well to bear in mind. The first lies in the difference between renting and financing. If you rent, whether it is a rental finance agreement or operating lease, or whatever other name it is given, the equipment has to be returned to the rental company at the end of the period. If you finance, it becomes yours. Both have pros and cons. The main advantage of rental is that you can then enter into a new deal, with new equipment, at a new rate. The main disadvantage of financing is that you become the proud owner of three-year-old IT equipment, which is just about due to be upgraded or replaced.

The second detail is found in the interpretation of a quarter. Says Andy Tompkins, BCX group executive of asset finance: "You sign a three-year agreement on 2 January, our quarter starts on 1 April. As per the agreement, you are due to pay 12 quarterly installments starting when the next quarter does.

"Some companies will charge you a per-day rate between your time of signing and the start of their next quarter." Others will negotiate with the client and agree on when the quarter starts and when payments should be made, he notes.

"The other thing is the 90 business days' notice," says Tompkins. "A lot of clients wait until day -91 to give notice, and a lot get caught out." The catch, of course, is in the difference between days and business days.

 

Downright dirty

Companies hiring office equipment (photocopiers, printers et al) would do well to be aware of this old scam. Says Printacom MD Neil Rom: "Corporates need to be wary of double discounting. For example, you buy a car, finance it through Wesbank, trade it in at the garage for a new one and finance this through Nedbank. The dealer takes the car, gives you a new one, but doesn't settle the amount with Wesbank, so a few months later, you're paying for two cars but only have one. This can never happen in the motor industry because it is too well regulated, but it does happen in the copier industry where companies have their own finance divisions. Whatever you do, make sure your previous rental is settled so you don't end up paying for two sets of equipment."

Something else you tend to see on printers or copiers, notes Tompkins, are escalation clauses. "I can understand the cost of maintenance increasing but the hardware cost is fixed on day one and shouldn't be escalating."

Clients should also look out for automatic renewal clauses, which extend the deal automatically with no rate change. "If you want to renew a deal for, say, 12 months' secondary rental, then the rate should be lower," Tompkins states. Companies should also read the early settlement details carefully. "If you leave the early settlement clause too vague you may be in for a penalty if you want to exit the contract early. You want to avoid being at the mercy of the financier."

According to Tompkins, the banks tend to charge up to three months penalty interest on the outstanding capex amount, while financiers that have built in a residual may not tell the client what that is, so will charge the value of the residual plus interest.

Penalties are also levied for equipment returned late or not at all. Says RentWorks managing executive for corporate and commercial Stuart Lewis: "The hard bit is managing the assets in the environment and knowing where they are at the end of term so that you can give them back and avoid being penalised."

Some companies offer asset tracking or asset management facilities that can assist with this. Penalties levied can be expensive. In the case of equipment that is past the lease period, companies will often charge on a month-to-month basis for a continued lease, at the same rate. In the case of equipment that is not returned, the cost will likely be the residual plus. Rental companies make their money by taking the equipment back and either renting it out on a short-term basis, e.g. for conferences, or selling it to the second-hand market. Not returning the equipment deprives the company of this income.


Ratings, ratings

Companies looking to lease need to shop around and ensure they are getting the best rate possible, as they would with any other procurement. Says Innovent director Zakhe Khuzwayo: "You need to know what the investment is and you need to know what the end of term conditions are." As far as the investment goes, Khuzwayo recommends that clients deal with a financier that operates separately to the hardware supplier. Instead of going to XYZ IT company and getting a price for the equipment plus financing, rather go to three hardware suppliers, get the best possible rate they can offer for the goods, then go to three financiers and get the best possible rate for rental.

Bear in mind that maintenance is an issue. Thankfully, these days financiers are willing to finance not only purchase, but also installation, consulting, maintenance and service of goods. Disposal of goods in an environmentally-friendly fashion is also an issue, and will be costly once the Waste Management Bill goes through. Companies that are not renting need to ensure they have adequate disposal strategies to avoid falling foul of the law. All data must be removed from machines in a way that ensures it is irretrievable before said machine goes back to the rental house. Many rental houses offer this service, but not as a default, and will only clean to a point. It is up to the renter to ensure data is removed to regulatory and legislative satisfaction.