An alternative source of finance

Views on leasing vary widely among local authorities. Some regard it as a vital part of their financial armoury for funding their activities. Others won’t go near it. And there are many in between, using leasing from time to time but not using it as an everyday source of finance.
    
Among the users of leasing, some authorities deal with lessors directly, some through an adviser or broker. The latter is certainly a growing trend in asset finance and leasing more generally. In Q4 2007, broker-introduced business done by members of the Finance and Leasing Association (FLA) increased by 18.5 per cent compared with Q4 2006.
    
Those authorities that do not use leasing have a variety of reasons. It’s worth examining the main ones.

Areas of concern
First, they may have had a bad experience in the past. This usually involved discovering that the terms of a lease were more onerous than expected.
    
To avoid this, I cannot emphasise enough the need to work through reputable providers and brokers. Members of the FLA have to adhere – as a condition of membership – to the FLA’s business code, which has a section devoted to local government and NHS business. The code’s main theme is the need to make the terms of the transaction transparent to the customer. You can read the FLA code at www.fla.org.uk.
    
There is an arbitration system for business and public service customers who have exhausted FLA members’ complaints procedures and remain dissatisfied. Brokers can join the National Association of Commercial Finance Brokers, which has a similar code.
    
Second, some authorities may view the product as difficult to understand. To address this, it is worth approaching (directly or through brokers) a variety of providers to ensure you get a competitive deal and that it is explained clearly to you before you finalise it. FLA members finance well over £ 1billion worth of IT a year, so the product clearly has something going for it.
    
Next, local authorities may be tempted to use funding from the Public Works Loan Board (PWLB). But this is longer term funding, sometimes borrowed for over thirty years. It was designed for big infrastructure projects that often last for such periods. As anyone who’s been on an introductory finance course knows, assets and liabilities should be matched. So if you want to borrow for an IT system with a probable shelf life of five years, you need five-year finance.

The benefits
All in all, there is a strong positive case for using leasing to finance IT investments. There are general benefits, which are applicable to all investments:

  • Leasing allows flexibility in payment terms to match funding streams.
  • You can limit your financial exposure from assets that decline in value over time in unpredictable ways.
  • It takes the strain off current cash flows – even more vital when, at times like the present, budgets are under pressure from all sides.

There are also IT-specific benefits:

  • The local authority can take advantage of technology refreshes. This is critical within the IT industry, as products have such relatively short shelf lives.
  • The IT vendors will dispose of the old lease equipment under the EU WEEE regulations.

Case studies
Finally, a couple of real-world examples may help you consider leasing:

  • Five Arrows Leasing recently funded a range of IT projects associated with an outsourced contract with a large municipal council. In its risk analysis of the contract, the council had to demonstrate access to the funded assets, including software, in the event that the contract was terminated. The IT projects that were funded covered a wide range of services, including CRM, Portals, SAP implementation, PC refresh and Project Management.
  • Syscap has recently financed a £3.2 million technology upgrade programme for the University of Plymouth. Syscap provided a bespoke funding structure to match and complement the university’s budgets and requirements. Based on a managed service agreement, Syscap has also arranged finance for desktop and asset management, and the university has the option to extend any of the finance agreements as necessary.

So if you are not among those local authorities that already use leasing as one of their regular sources of finance, why not try it?

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