Does Dell have a subprime lending problem?

Offering financing services to customers is nothing new for big computer hardware makers. Unfortunately, running into trouble because of those vendor financing programs is almost as common.

Tucked into a piece on Apple and patents on Barron's Online is an interesting tidbit about Dell. No, Dell hasn't been handing out loans for houses in suburban Las Vegas or some other distressed real estate market. This appears to be an indirect deal. It seems the Texas computer maker, thanks to its partnership with troubled lender CIT Group, could surprisingly find itself stung by the subprime loan mess. At one time, CIT owned a 30 percent stake in Dell Financial Services, which was founded about 11 years ago to provide leasing programs to small businesses. Dell has been unwinding the relationship with CIT for nearly two years and bought back the last percentage in the fourth quarter of 2007.

(Credit: Dell)

How much of a problem CIT's issues could pose to Dell is hard to say. Here's where the numbers get tricky: At the end of the fourth quarter, Dell had $2.1 billion in financing receivables on its balance sheet. Of that, $450 million of customer receivables had been facilitated through CIT, according to a Dell spokesman. At the same time, Dell had $10 billion in cash. Barron's reported about 9 percent of Dell's 2008 sales have been generated through the financial services arm, but the CIT link for that 9 percent should be less than in the past years.

Does that mean Dell won't see any of that $450 million if CIT, which has been hammered by defaults on subprime loans (among other issues), should continue to falter? No, but there's at least some exposure there. It could be another aggravation for Dell, but the fallout would pale in comparison to other problems the computer maker has faced in recent years, such as exploding laptop computers. The Dell spokesman said the company is assessing the CIT situation (the two companies still partner) but that it hasn't made a definitive decision what to do about it.

CIT is facing bleak prospects. Some Wall Street analysts are calling for the company to sell itself to a bigger financing outfit, like General Electric's commercial lending arm. A Monday Wall Street Journal article explains the predicament for the once high-flying outfit.

So why do computer companies do vendor financing if there's so much risk? Because they have to, particularly if they're looking to sell equipment to small businesses. But loaning money to customers comes with risk: It can be a temptation for some executives to fudge the books. Also, if customers go under or the financing goes awry, the equipment maker can end up holding the bag.

Could Dell end up holding the bag to the tune of $450 million? Not likely, and it's difficult to put a dollar figure on the CIT problem at the moment. But it's one more headache Michael Dell & Co. would probably be happy to avoid.

[Charleston Charge]

Dell Financials

Dell Financial Services is the worst. We used to purchase all of our equipment through Dell and could use a credit card. Then several years ago they decided we couldn't do that and had to use their financial service.

That was the biggest mess. We would receive statements with little detail and hard to tell even how much was due. We told them we did not want to use their financial services anymore but were told that's the way it had to be. Well we agreed that's how it had to be and we took our business elsewhere.

[Collin1000]

Enough with the explosions!

What is it with every single dell story always having a link to the explosion thing? I just joined the cnet site so that I could make my case be known - its time to stop. That happened in 2006. This is 2008 now. Its time to move on and stop linking to it in just about every story you publish about dell. They were recalled. I can name dozens of other tech products that were recalled numerous times before. No more explosions since then. Time to move on.

[avfolk--2008]

Reality distortion, Dell-style

The bad news for Dell isn't just hundreds of exploding batteries,
the recall of a million dangerous power adapters, or even the
illegal accounting practices, under-the-table bribes from Intel
booked as 'sales income', or even the failed retail sales
initiatives.

The REAL bad news for Dell is the sales tactics used to strong-
arm corporate, government, and educational sales, the false
bait-and-switch on 'Vista capable' machines, and their abysmal
-- and still sinking -- record of customer satisfaction and
customer service.

Dell had a good ride considering the narrow premise of their
'build them cheap -- sell them cheaper'.

The sub-prime fiasco is deserved... when you can't make
money on a product -- make money on the money used to
purchase it. Hey, it worked for GM.