‘0% finance’ to the rescue

The next few years look set to be lean times for IT vendors. Not only are companies expected to shrink or at least freeze IT spending, those that do wish to invest in business enhancing systems may find themselves unable to justify or raise the necessary capital.

According to a November survey by the European Central Bank (ECB) on business lending, there has been ‘a significant increase in the net tightening of credit standards for loans to enterprises in the third quarter of 2008.’ And even where they have cash, business boards are sitting on it as a contingency against worsening market conditions.

Now, though, IT vendors who have built up multibillion dollar cash mountains over the years are taking matters in their own hands and, adopting a practice more common in the car and furniture businesses, offering customers interest-free loans – for as long as three years – with which to buy their products.

SAP got the ball rolling this October with an offer to US customers of ‘0% financing’ for up to 12 months on purchases of over $64,000. ‘We’re trying to take reasons not to buy off the table,’ explained Jeff Stiles, an SAP marketing executive.

In November, Microsoft followed with a wider offer for its Dynamics range of business applications. New Dynamics customers spending between $20,000 and $1 million essentially get the product interest free for 36 months.

Dell has also announced a 0% finance offer for its US corporate customers. ‘It’s really a bit more than just saving dollars on the monthly budget. It’s enabling [customers] to procure the equipment,’ said Larry Graves, general manager at Dell Financial Services.

And people close to Cisco (a company with $26 billion in the bank) suggest it is considering an even more radical option in which it funds much of the networking hardware outlay behind customers’ new projects.

Microsoft, with over $20 billion in cash reserves, is using other financial services providers to underwrite its loans to Dynamics buyers. As such, these are as susceptible to market conditions – as with any loan – perhaps explaining why there is rigidity in how it qualifies applicants for the loans.

These interest-free loans offers may well persuade customers to pursue software projects that might otherwise have been shelved due to economic pressures. But they also reveal quite how concerned the industry is about the future.

The experts’ response…

Chris Ingle, consulting and research director at IDC’s European Systems Group, says 0% financing deals are just one way in which IT spending is set to change

Traditionally, vendor financing has not been popular for many customers because they could finance purchases more cheaply through other credit lines. However, as the ECB bank lending survey continues to show a tightening of credit, IT vendors, many of whom are sitting on a lot of cash, are a more attractive source of financing. The current downturn may be the spur for organisations to rely on both vendor financing and also on more long-term relationships with their suppliers – for example making rented models, such as SaaS, a reality.

Ray Wang, principal analyst for Forrester Research, praises vendors for boosting the buying power of customers when it is needed most

In effect, the vendors have done what governments should have done with their bail-out funds, which is to increase liquidity so that businesses can carry on and have access to credit under the right underwriting conditions. Since the banks have not done this, what Microsoft and Dell have done is significant. Other tech vendors are also considering similar moves to free up the log jam. Bottom line: shame on the financial services industry for hoarding the cash instead of lending it and exacerbating the current crisis.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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