IT shops borrow money, lease in droves as recession strains budgets

IT shops are seeking loans and lease agreements in rapidly increasing numbers as they struggle through a recession. The worldwide market for IT financing and leasing is set to exceed $100 billion in calendar year 2009.

Last year, $88 billion of IT hardware, software and services was financed or leased, compared with $80 billion in 2007 and $72 billion in 2006, according to IDC.

Slideshow: What tech CEOs are saying about the economy

"There is an uptick in IT leasing and financing practices. Companies are considering it because of the constraints around capital investments," says IDC analyst Joseph Pucciarelli. "You're looking at a year-over-year growth rate that exceeds 10%."

Financing and leasing of software and services is growing about 20% a year, while hardware financing is growing at a slower rate of 4%, IDC analyst Susan Middleton says.

Besides the short-term benefit of delaying purchase costs, companies are also responding to new tax benefits provided by the federal government. Pucciarelli said the Economic Stimulus Act of 2008  offered new levels of tax incentives for purchasing IT equipment and software.

Click to see: Chart of IT financing

IDC and vendors with large financing arms such as IBM, HP and Dell expect that demand will continue to increase this year. IBM is getting ready by pledging $2 billion of financing money for technology projects related to the American Recovery and Reinvestment Act of 2009, saying the money will go to healthcare organizations, energy providers, enterprises and municipalities.

"Every CFO or treasurer I meet is re-looking at their capital structure and how they use cash," says Richard Dicks, the general manager of IBM's Global Financing team in North America. "They're looking for other ways to acquire IT assets."

Customers that were already financing and leasing IT purchases are turning to that option more often, and customers that previously avoided borrowing have concluded that financing is now necessary.

CFO Bill Shea of 1-800-Flowers says his company obtained a three-year lease from IBM to purchase WebSphere software, which the New York-based company is using to revamp Web sites devoted to its various food brands.

"With cash flow being lower than in prior years, to keep a little more powder in the gun we did use financing," Shea says. "It has not historically been a vehicle that we've used [for IT purchases] but we did use it this past year with the economic downturn."

Shea says 1-800-Flowers borrowed about $3 million on an unsecured lease line with about a 5% interest rate. Although it is technically a lease agreement, 1-800-Flowers will own the software at the end of the three years. That's a good deal, he says, but Shea would rather not have to resort to financing in the future.

"A lot of it depends on how the economy changes," Shea says. "Does the consumer come back and buy with the vigor they were back in 2007 and 2008? All things being equal, we would just use our cash flow to fund our capital needs, as we did for many years, and use financing for acquisitions and working capital purposes."