Tech Leasing May Be An Early Beneficiary Of Turnaround

Business-technology software and equipment leasing is expected to revive as businesses replenish IT stocks while preserving cash.

The IT leasing industry, a conglomeration of captive and third-party lessors, banks, and channel distributors, posted $23.8 billion in volume last year, its lowest level since 1998, according to a study that the Equipment Leasing Association commissioned.

IT leasing peaked at $26.1 billion in 2000 and has dropped for the last two years, reflecting pinched budgets. As purse strings loosen, volume is projected to grow 6.5% annually--far healthier than the 1.5% annual growth rate of the last five years. "Companies can't wait much longer to invest in productive capital equipment in the IT sector," says Ralph Petta, the association's VP of industry services.

IT is one of the few bright spots in the ailing U.S. equipment-finance industry, Petta says. Other industries that depend on lease financing, such as airlines--half the U.S. airline fleet is leased--are making do with older equipment until the economy improves. PCs and workstations were the largest IT leasing segment in 2002, with nearly $9 billion in volume. Mainframes and servers were next at $7 billion, followed by software at $4 billion.

A lot of IT purchasing decisions are in the pipeline, says Deborah Monosson, president and CEO of Boston Financial & Equity Corp., which leases primarily to startups and other cash-strapped companies with deal sizes averaging $500,000 to $750,000. Faced with tight credit even in normal times, cash-poor companies are scrambling to locate financing. "I get called in after the vendor's captive leasing company turns them down," Monosson says. "The captives are becoming more conservative" with these companies.

Companies with more options are more aggressive in negotiations, demanding contracts with higher residual values, which reduces the amount they have to finance and forces the lessor to assume greater risk. They're also demanding technology-refresh clauses that provide free upgrades during the lease's life.

Businesses look for lessors with specialized technology knowledge, giving an edge to captive leasing companies such as IBM Global Financing, HP Financial Services, and Dell Financial Services. Since their primary mission is to move product, they're able to price leases aggressively. That's leading to a shakeout in IT leasing. "With the market flat, most of the larger players are getting market share at the expense of smaller players," says Warren Axelrod, a VP at Bank of America Leasing & Capital, where IT leasing accounts for a substantial portion of business. It also creates opportunities for sharp-eyed CIOs to drive harder bargains.