Financing your infrastructure
Consider an alternative line of funding infrastructure upgrades that won't affect your organisation's operational funding facility with its current bank.
Organisations often underestimate the effect that an infrastructure failure could have on their ability to conduct business. The detrimental effect on planned cash flows when infrastructure fails outside of a budget cycle is often not taken into account as a real cost of not upgrading IT infrastructure timeously. A fitting example is the load-shedding that plagued our country recently. How many businesses were able to carry on as normal without a reliable electricity supply? Some organisations simply shut their doors or were unable to offer a full service until the electricity supply resumed.
Businesses often delay or cancel maintenance and infrastructure upgrade projects because of a lack of available funds or pressure to reduce spending in cash-strapped times. But this needn’t be the case. Entities reluctant to approach their financial institutions for additional funding for infrastructure upgrades should consider partnering with a business that can provide the necessary hardware and software, as well as offer the financing thereof.
Financing for infrastructure is not a new offering for South African businesses, but the way in which the financing can be done is evolving. Much like financing cars and other assets, infrastructure installations can also be financed, and this applies to projects of all sizes. In these cash-strapped times, this offering allows companies the flexibility to have the right infrastructure in place and be able to fund this over a period matched to operational cash flows.
What this means, says Lawrence Weitzman, director at BT-SA (Business Technologies SA), is that when you finance infrastructure, you don´t have to pay for the asset upfront and then only recoup the money over several years. With a financing option you can buy the infrastructure so that you can immediately deliver better or new services to your customers and use the additional monthly income to pay for that infrastructure.
Yes, companies can turn to traditional sources of funding, such as their bank, which provides all the funding solutions that the company might require. But the approach advocated by Weitzman offers the business an opportunity to access funding that doesn’t affect the day-to-day funding available from its bank. It provides an alternative line of funding that doesn’t affect the organisation´s operational funding facility with its current bank.
Weitzman says: “When you look at acquiring any piece of equipment, whether you finance it or use your cash resources, you have to consider what will give you the best return on your money. This doesn’t change the commercial decision-making process within the business about how to deploy your resources, it just provides the business with an opportunity to match its cash flows.
“The question to ask is: Is there a potential matching of cash outflows with revenue streams, or is the purchase a pure investment? If the answer is the latter, then you probably wouldn’t finance that asset. Also, if the business has a large amount of surplus cash and isn’t getting a great return on it, then I also wouldn’t finance infrastructure.”
Weitzman is proposing that the business apply normal considerations around commercial viability. “By financing your infrastructure acquisition, you’re committing to a longer-term repayment, so if you aren’t generating income out of the asset, and if you have the ability to pay cash, you’d be better off doing that. Unless you can find a better return on that cash elsewhere, that is.”
When it comes to different financing models for infrastructure, he says there are two approaches. “You can finance something to own it at the end of the repayment period, or you can finance an asset on an operating lease. The best known example of the operating lease in practice is the office printer/copier, which is rented for life with a replacement cycle. This type of business model is starting to be applied to normal IT infrastructure as well. You pay per unit or device and that includes maintenance and any software licences. It is basically the same model as the traditional copier one. You never own the item outright, and you get a new one every couple of years.”
However, he issues a word of caution. In the past, items acquired on an operating lease didn’t appear on the company’s balance sheet. A new accounting standard, IFRS 16, means that leased items must appear as assets and liabilities on the company balance sheets, but one still needs to look at the commercial rationale for financing an asset rather than just the accounting treatment.
Consider the following benefits of financing infrastructure through an organisation other than your financial institution:
- Work within your capital budget constraints;
- No upfront cash outflow;
- Align the upgrade benefit with your cash flow as repayment starts on completion;
- No effect on your operational funding lines;
- Repayment over 24 to 60 months means that your income-generating equipment pays for itself over the term;
- Fixed interest rates are available over the term, making it easy to budget; and
- Equipment and upgrade costs can be bundled in a single monthly payment.
Businesses need to prepare for future eventualities in order to succeed in a rapidly evolving environment.