Leasing IT systems can free up cash for retailers while still allowing them to invest and upgrade. But with banks increasingly wary of lending to the retail sector is it still an option, asks Liz Morrell.

As the credit crunch hits home, retailers are cutting costs – and capital expenditure – wherever they can.

The IT director’s fight for cash can be a tough job at the best of times. Explaining to the board the urgency of investing now is a challenge few envy. “The cash flow of a business is critical, so it’s hard to justify spend at a time like this,” says one former IT director.

But for something that is increasingly business-critical, slashing IT investment can be a foolhardy step. “It’s important for retailers to maintain their IT investment. Otherwise, when trying to catch up later, it will be twice as expensive,” says Brian Hunt, strategic account manager and head of retail at IT leasing specialist ECS.

One solution for retailers that can’t afford to invest is leasing, which allows them to hold onto their cash. “Leasing is very popular and for the smaller retailers it has always been a way in which they would fund their business, because it’s a way of spreading the cost,” says sales and marketing director Daniel Proctor of Capital Solutions Group (CSG), which provides bespoke financing for companies through mainly unsecured leases and loans.

Siemens Financial Services provides white label finance for SAP and has just completed a multimillion-pound leasing deal with a UK retailer for an ERP system. “Leasing gives you flexibility and allows you to keep moving rather than digging your heels in and finding out in two years’ time, when the recession is over, that everyone else has moved on,” says Siemens Financial Services UK general manager Peter Austin.

As well as freeing up cash to invest in other parts of the business – which may then generate more revenue than the cost of the finance agreement itself – leasing and hire purchase schemes can also be advantageous from an accounting point of view. “A lot of these companies get a better return investing in other areas of the business rather than tying it up in a depreciating asset,” says James Noonan, director of IQ Finance, another IT leasing specialist.

Various types of leases also give different tax savings and allowances and in some instances permit the purchase to be taken off the balance sheet altogether because the payment becomes an operating expense allowable against taxable income (see box). Borrowing and gearing can therefore be reduced.

But the market is constricting, as banks worry about lending to recession-vulnerable sectors such as retail. “The retail sector is being avoided by the banks,” says Noonan. The banks are also worried about companies that have high financial exposure. As a result, other leasing companies are following suit, with a number either withdrawing from the market or making themselves uncompetitive.
“There are a lot of leasing companies scaling down the type of goods they will finance and the sectors they will work in – of which retail is one,” says Proctor.

This is partly because they are worried about the stability of the retail market. “We have seen more bad debt with retailers than with any other sector,” says the director of one financing company.

Lenders are also wary of IT because of its rapid depreciation. “There is no security in the asset for their funds. IT is integral and can cost more for the banks to take it out than it is worth second-hand,” says Noonan.

Getting a good deal
But leasing is still an option, claim the specialists. Companies such as IQ Finance and ECS are not tied to one lender or underwriter, so claim they stand a better chance of being able to get a retailer the deal it needs.

“From a retailer’s perspective, it means they are not tying up credit lines with their banks, which at the moment are like gold dust,” says Austin.
And leasing isn’t just an option for retailers that have little cash, claims Noonan. “You can lease for tax efficiencies but it also makes better use of budgets. For example, it can be easier to get money signed off through a revenue budget (eg a£3,000-a-month leasing deal) than a capital budget where the entire amount would be payable,” he says.

“It’s not about affordability all of the time, which is a common misconception,” says Noonan. “A lot of companies can get a better return investing in other areas rather than tying it up in a depreciating asset.”

And although many retailers will not admit to it, IT leasing is commonplace, he says. “Companies that are cash-rich are normally cash-rich for a reason – and that’s because they are sensible with their cash and do lease,” he says. “It would be hard to find a company that didn’t borrow money,” he says.

Some retailers disagree, however. As finance and IT director at Long Tall Sally, Tim Williams is responsible both for coming up with the IT investment plan and signing it off, but says he doesn’t use leasing – although he has done in a previous role. “We haven’t used it and would try to avoid it,” he says. The additional cost puts him off, despite the accounting advantages. “We typically don’t spend more than we can afford and have a great hatred of incurring costs where we don’t need to.”

But he admits the company’s venture capital backing means it is at an advantage. “We are lucky we are in a position where if the cash is needed we can get it in a more cost-effective way. However, that’s not to say we wouldn’t consider it in the future,” says Williams.

Hunt says retailers that aren’t so cash-rich must be wary of closing their mind to leasing. “Leasing is more expensive compared to what?” he asks. “Business failure? Tying all my cash up and not being able to spend on something else? We take a lot of time working with finance and treasury teams and IT to understand what they are trying to do and to mitigate the risks,” says Hunt.

Peacocks operations director Neil Burns says the retailer uses leasing on occasion – such as for a new EPoS roll-out three years ago – but that it funds smaller value projects itself. “Leasing for us is more of a finance decision than IT trying to make our budgets stretch. We are more likely to review projects rather than consider how we finance them,” he says.

Somerfield business systems and technology director Mike Bell says that historically the retailer leased everything. “For the old Somerfield, leasing was of interest. When I first came here four and a half years ago we leased everything so we could spread the cost – and would have leased my grandmother,” he laughs. “I’m now unbundling that,” he says.

Bell claims leasing can encourage lazy thinking and poor analysis of the benefits of investing. “Where I’ve got leases I’ve been looking at ways of getting out of them in the last six months or so because in revenue terms it will save me cash. If I have the cash I would rather spend the cash and drive for benefit. Why would I spend money not to make money? That drives how you think about and how you deliver a project and also how you fund it,” he says. “Now we are focused on the delivery of benefit quickly. In the past, we would say: ‘We will get the benefit in two years.’ Now we go for the quick wins first so we can try to get them self-funding,” he says.


Somerfield’s IT department is run at 0.4 per cent of revenue compared with many companies that run at about the 1.3 per cent mark, Bell says. “We’ve driven it down by cutting costs. And because we have managed our cost lines firmly I’ve released money. My investment in infrastructure has actually gone up in the last two years. I’ve released the money so I don’t need to lease,” he says. “When I started, we were spending£33 million just to keep the place running. I now spend£17 million,” he says.

However Bell admits leasing does have benefits. “There is absolutely a place for leasing when it’s big things like changing my EPoS but I don’t think there is a need to lease as much as we used to,” he says.

Although deals may be harder to come by, Proctor points out that the technology providers still want people to buy their kit and so will work with their retailers and finance providers to try and broker a deal that suits all.

For those that may have already invested but need cash the finance companies are also increasingly offering sale-and-leaseback deals and/or managed-service deals where a contract is negotiated on a price per head per month per year basis over the fixed-term period specified, but with all the services and maintenance bundled into the package.

Noonan says that leasing will continue to be a popular option, albeit a tougher one to secure.

Hunt has the same argument. “We are financiers and specialists in the technology arena. We can go out and procure the right technology and we will show you how we can reduce the acquisition cost,” he says. “We can improve cash flow by using leasing and spreading the cost of finance over the useful life of an asset and demonstrate time and again how consistently leasing can work over a traditional cash purchase,” says Hunt.
As times get tougher, maybe we will soon see more retailers being swayed by these advantages.

TYPES OF LEASE

Finance Lease

Benefit: Greater ownership
Typical term Two to five years
Typical value£10,000 upwards
Available for small investments as well as larger agreements, this product is attractive to companies wanting slightly lower payments and greater ownership.
The asset appears on your balance sheet, since you take effective ownership. You can claim the lease rental against taxable income (but not the writing-down allowances). At the end of the term you can return the asset, enter a secondary rental period (usually for a peppercorn amount) or elect to take title for a nominal fee. This can be agreed in advance.

Operating Lease
Benefit: Off balance sheet
Typical term One to three years
Typical value£100,000 upwards
This product gives you tax advantages, cost savings and reduced risks. Lease rental includes VAT and can be treated as an operating expense, allowable against taxable income. The asset doesn’t need to appear on your balance sheet.
The lessor still owns the asset, so this helps reduce monthly payments and removes the risk of owning outdated equipment in the long term. At the end of the agreement you can return the kit for free disposal – or arrange an extension, usually on highly favourable terms and often at a peppercorn rent.

Payment Plan
Benefit: Maximum flexibility
Typical term Three years
Typical value£25,000 upwards
Similar to an unsecured loan, this product provides the funds you need, either to the IT vendor or direct to you in full, as required. Whatever you purchase belongs to you.
The funding isn’t tied to a fixed asset, so this lease is ideal if you want to make broader IT investments in areas such as services, training and maintenance. Spending appears on your balance sheet accordingly. The interest you pay can be claimed against taxable income.

Lease/Hire Purchase
Benefit: Traditional agreement
Typical term Two to five years
Typical value£10,000 upwards
This familiar product is a straightforward purchase agreement, with ownership of the asset passing to you at the end of the agreement for a nominal fee (usually£50).
VAT is payable upfront on the purchase price of the goods. The asset is shown on the balance sheet and you write down allowances in the usual way. The interest element of each agreement can be offset against taxable income.
Source: Iqfinance.co.uk