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Tech Industry

Buy IT today, pay tomorrow

IBM, Microsoft and others introduce financing plans intended to entice reluctant buyers. But the programs carry a certain amount of risk for tech vendors.

Technology vendors are increasingly hoping to revive sluggish IT spending with financing deals intended to entice reluctant buyers.

On Tuesday, IBM introduced a new financing plan called Total Usage Financing that is designed to make its on-demand computing services more attractive to cash-strapped businesses. The plan spreads the cost of technology purchases over several months and includes a revolving line of credit.

The plan is just the latest from IBM as it tries to stimulate spending. In a move that sounded more like a pitch from a car maker, IBM in October announced a "triple zero" financing package, offering large and midsized businesses zero down, zero payments and zero interest until 2003.

Other technology companies are taking the same route. Microsoft in October unveiled new programs that allow small businesses to take out loans to finance software purchases. The company also launched a special 24-month zero percent financing promotion targeting customers of Microsoft's Business Solutions division, which sells enterprise resource planning and customer relationship management software.

And Hewlett-Packard last month launched a program offering a three-month deferral on all transactions. The 90-day holiday program applies to any size purchase, including hardware, software and services.

HP and IBM executives pointed out that their financing programs aren't new. But analysts say they've seen increased attention to removing any financing barriers for customers.

"Vendors overall are trying to make it as easy as possible for customers to invest in technology, whether that means paying less up front, less later on, or just less overall," said John Madden, an analyst at Summit Strategies in Boston. "It's all about putting another element on the table that will inch customers closer to actually purchasing," he said, adding that vendor financing plans have become much more common in recent months.

It's unclear whether the new financing programs have generated a significant number of new sales. And the plans are not without risk. The telecommunications sector presents a good example of how vendor financing can go bad: Companies such as Lucent Technologies and Nortel Networks were badly stung when their customers were unable to repay loans taken out to purchase equipment.

Financing for software is somewhat more unusual, particularly in the small and midsized business market. It's not so much a technical issue as a financial one; software depreciates almost immediately, unlike computers or office equipment. So banks and other lenders are reluctant to lend companies money to make purchases.

For technology makers, the risk may be worth taking, because the financing deals encourage customers to make purchases now instead of waiting a few quarters.

"Customers have been deferring investments for all the obvious economic reasons," said Mike Kahn, chairman of consulting firm the Clipper Group in Wellesley, Mass. "What IBM is trying to do is give them an economic incentive to act now, rather than the first quarter, by (providing) attractive terms."

That was the case for Bob Shaw, special projects manager for Hughes Supply, a $3 billion wholesale distributor of building materials based in Orlando, Fla. His company recently bought an HP Superdome, a high-end server.

"They gave us a terrific deal on a purchase price, and then they extended the terms to boot. So it was a win-win for us," Shaw said. "It delayed our capital outlay, and anytime you can do that in this economy is something we want to do."

Shaw said financing options didn't influence his technology choice, but they did influence the timing.

"In this case we weren't looking to purchase at that particular time," he said. "But they put together such a great price and the terms to go along with it, that it (convinced) us to escalate when we were going to do that purchase."

Bringing in the big bucks
Financing has been big business for other tech companies. IBM has been offering financing programs for years; its Global Financing division, which controls more than $40 billion in assets, reported revenue of $795 million in the third quarter of 2002.

HP's Financial Services division recorded revenue of $510 million for the third quarter of 2002.

And Microsoft isn't alone in tapping the software market; Best Software, a division of Sage Group that owns the Peachtree, ACT and SalesLogix brands, recently announced a financing program backed by American Express.

"We've seen great take-up with our channel and a lot of demand for this," said David Butler, president of Best Software's midmarket division. "I think partially because it allows customers to acquire new systems without requiring additional lines of financing, and that's been a big plus."

Pitching the financing along with the software saves small businesses that problem and may help close sales, said Jennifer Chew, an analyst at Forrester Research.

"It removes one of the excuses that small and medium business customers have--that they don't have a lot of up-front cash," she said. "In that sense, it will drive additional revenues for these (software and reseller) companies."

Stretching out payments was a big incentive for Mid Atlantic Marine, a Warsaw, Va.-based boat dealership that recently signed up for a three-year financing package.

The company was looking to replace its entire software suite, installing new applications to handle inventory, parts, sales, accounting, services and work orders, as well as upgrading all of its hardware, said manager Amy Dameron. The financing package was suggested by the software reseller, Software Solutions, she said.

The $70,000 price tag is a big one for the 10-person company, which handles about $3 million in sales annually. Dameron said she knew they'd need some sort of financing program to do the upgrade at all.

Without the reseller's offer "we would have had to explain it to a local bank that we deal with, and for them to even understand what we were talking about" would have been difficult.