IBM Revives Low Rate Financing Deal for the System i5

Published: February 27, 2006

by Timothy Prickett Morgan

IBM's on-again, off-again Low Rate Financing offering for its various server products expired on December 31, but is was revived two weeks ago on the System i5 product line. The good news is that even though interest rates are trending upward, financing rates are down below the rates IBM was charging in May 2004.

If the gap between actual interest rates on the street and what IBM is charging to finance OS/400 server deals is any indication of Big Blue's eagerness to do deals, then it is probably safe to say IBM is pretty eager. The U.S. Federal Funds interest rate, which the Federal Reserve Banks charge commercial banks overnight loans, is about 5.5 percent on an annualized basis, up from about 3.5 percent a year ago. This is the key interest rate that the prime lending rate is keyed from. Through 2005, IBM kept revising upward the rate it was charging for its Low Rate Financing deal, which spanned all of its server products and included storage, printers, and other capital equipment, and the final deal of 2005 had iSeries, pSeries, zSeries, and xSeries deals for customers with squeaky-clean credit able to finance at 4.25 percent; software and services were financed at 4.55 percent. As you can see, IBM was charging well below the street prime rate (which was about 5.5 percent a year ago and is now 7.5 percent according to a consensus survey of banks by The Wall Street Journal) and even below the Federal Funds rate. With the deal announced on February 14, IBM is charging as low as 2.9 percent interest on System i5 financing deals. That's 2.6 percent below what the Fed charges for overnight loans and 4.6 percent lower than the prime interest rate in the States.

Instead of deeply discounting its i5 sales, and therefore cutting into its revenue stream, IBM has decided to push the System i5s by offering very low financing rates. IBM, as one of the largest lending institutions in the world and a company with very good credit itself, can afford to be a bank--particularly if it locks a customer into a 24- to 60-month lease. Under the financing deal, the 2.9 percent financing can be applied to deals ranging in size from $1,000 to $1 million, and can be applied to purchases of new System i5 machines (and presumably iSeries i5 boxes, too, which have the same product numbers) as well as to upgrades from iSeries 810, 825, 870, and 890 machines into the System i5 line. Shipments of the machines acquired under the lease must ship by March 31, which is the end of IBM's first quarter. The deal is also in effect in Canada, where the best rate is set at 2.4 percent.