Minnows under threat as credit pool shrinks

LAST week, Ahmed Fahour delivered a sobering reminder of the impact on Australian banks of the credit crunch.

The local chief executive of National Australia Bank says borrowing money anywhere in the world has become much more expensive, regardless of cash rate reductions by the Reserve Bank.

Over the past few months the average cost of funding has increased between 30 and 40 basis points, which has not been factored into pricing, Fahour says.

Running a fine-tooth comb through business loans will be an even lengthier process as the global credit pool shrinks, he says.

"In addition to the increased impact on our total cost of funds (30-40 basis points), the international credit crunch has made it more difficult and expensive for Australian banks to borrow money internationally for medium-term and long-term funding.

"This has pushed up demand for domestic deposits and wholesale funding, and this has forced banks to pay much more for deposits, further increasing the total cost of funds, which is likely to be around 50 basis points over the next 12 months," Fahour says.

The cost of money has skyrocketed and to access funds, businesses, especially smaller players, have had to work even harder to prove they are less risky than their neighbour.

Amid the economic slowdown, businesses need access to cash to remain viable, and technology financiers are experiencing high demand for their services.

IBM Global Finance Australia general manager Brett Vincent says demand for its offerings, especially from small and medium-sized companies, is increasing.

"We see a spike in the need for our services, but what is important is we have the money to support the demand," Vincent says. "Businesses need to continue to operate, and in tough times cash flow becomes a very important part of any business.

"They need to be able to pay wages, they need to be able to pay their debts, so when liquidity starts getting tight people start looking for alternative funds to ensure that they have the cash flow to continue operating," he says. It pays to be liquid. IBM has $US10 billion ($14.8 billion) in its kitty to spare for lending.

"We finished the quarter with almost $US10 billion in cash on hand, and we demonstrated strong access to the debt markets by raising an additional $US4billion," IBM global chief financial officer Mark Loughridge said at the company's third-quarter earnings call last month.

"Our liquidity position is also very strong."

Vincent says Australian companies can tap into that pool.

"We're one of the fortunate people in this market. Unlike a lot of our competitors who go to the market to get cheap money, IBM is able to go to the market when the money's cheap and also able to use the vast amounts of cash it has on its balance sheet."

In the US, IBM's default rate has risen from 1.1 per cent in the three months to June to 1.3 per cent in the September quarter.

IBM's financing unit had $US24.5 billion in loans outstanding at the end of 2007. It is not all doom and gloom for Big Blue's finance business in Australia.

"In client financing or direct financing we have not seen much change as yet in defaults or rates," he says.

Instead of spending their own cash, IBM's clients are trying to extract more value in technology financing, Vincent says.

"Some customers want to continue using technology but do not necessarily want to use their cash to purchase upfront.

"So they are saying they will use financing to allow them to maintain their cash and pay their people while still getting the technology to give them a competitive edge," he says.

His advice to companies contemplating expanding their IT infrastructure or upgrading a few computers is to question why they need the asset.

"Financing can be the cheaper option compared with spending money outright but people first need to ask themselves whether they want to own the asset or use the asset. "If you do not want to own it in the end, why pay the full price upfront?"

IBM does not have a fixed rate, as the financing terms would depend on a range of variables, especially the client's ability to make repayments. It also has a 90-day interest-free offering.

Apart from client financing, the company's two other business units are inventory or commercial financing and global asset recovery.

With inventory financing it works with partners, including Lenovo, APC-MGE and Juniper Networks, to extend the number of days they have to pay for IBM's or the partner's equipment.

"The standard would be 30 days but in some cases we might look at doing 60 or 90 days," Vincent says.

The asset recovery business is undergoing a sudden boom, he says.

"This is getting a lot of traction and I do not know if it is because of the situation in the economy or if it is government regulations, but the demand for our global asset recovery services, which is about taking equipment back and disposing of it efficiently and according to green credentials, has dramatically increased."

Other companies such as Hewlett-Packard, Dell and Oracle also offer some form of financing in Australia.

HP financial services division global spokesman Michael Cuno says it offers both fair market value leases and finance leases, at the end of which a customer owns the asset.

"Rates may vary depending on any number of factors, including the total value of the transaction, the equipment and/or services involved, a prospective customer's history or relationship with HP, and special promotions that may be available," Cuno says. "The length of a lease will vary, typically according to the type of equipment and a customer's preference, although three years is common."

Dell Australia does not lend directly to local customers but works through a third party, CIT Group.