How small firms can finance technology purchases

Published on: 
10/16/2006
Published on 10/16/06

Purchasing new computers and software, or even subscribing to a database research service, can have a significant return on investment.

Many larger law firms establish formal budgets for their technology purchases. Surveys I have done show that the majority allocate up to 4 percent of gross revenue for hardware and software purchases and age-out their technology on a three year-cycle.

By contrast, many small firms resist buying or updating technology because they are overwhelmed by the high up-front expense. Their upgrade cycle may be as great as six years. To pay for an upgrade, these firms typically pursue one of several options.

  • Cash
  • This is typically done only for a small purchase (a single computer and its software licenses). It eliminates finance charges and fees, but even the few thousand dollars required are enough to be a deal-breaker for some firms.

  • Leasing
  • Leases facilitate more frequent upgrades, protect a firm's credit and can even offer tax advantages. However, lease arrangements are typically limited to computer hardware, still leaving the firm to come up with cash for software and implementation.

  • Manufacturer financing
  • Programs like Microsoft Financing program can include items such as technology and services that are usually not covered in lease packages, and may be for as short a period of time as two years. But such programs are the equivalent of taking out a loan, with an organization that may not be as flexible as your local bank.

  • Loans
  • That leaves the final financing alternative, a traditional bank loan. Depending on the relationship and credit standing that you have with your bank, a line of credit, equipment loan or term loan may be your best financing alternative. The cost of such loans varies (factors include your bank balance, other services purchased and credit rating), but typically can be 8 to 10 percent or prime rate plus 1/2 to 1 percent, with a document fee and even perhaps 1/4 to 1 point in financing charges.

    An important issue in technology loans is that the minute you purchase computers or software, their obsolescence is assured. Their value to the bank isn't nearly so great as a hard asset like real estate, no matter how expensive the technology is.

    Banks may accept technology as collateral, but will not put a high value on it. It's fair to say that bankers are nervous when it comes to financing IT purchases. Thus, the prospective borrower must put his/her/its best foot forward and provide as much safety to the bank as is possible, especially by contributing both capital and collateral to the overall financing package.

    Technology investments, as all other investments made by the law firm, must provide a "reasonable" return to the firm. Analyzing your expected return is just as important for the financing process as it is for the decision-making process because the lender will want to know how the purchase will impact your practice and how you plan to repay the new debt.

    Thinking through the purchase and getting as much personnel involvement, "investment" and "buy-in," to the purchase before you make it are the best ways to achieve your objective - and to keep your banker happy.

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