Taking the Mystery Out of Software Financing and Software Leasing
The very terms “software leasing” and “software financing” are confusing to many businesspeople. This is due to the fact that software is typically not seen as something that is purchased over time.
This view is shared by both end-users, and the developers of software. Companies who think nothing of financing a vehicle or a new computer system will stress over how they will pay for expensive new business software. And the producers of software see no need for offering a software leasing or a software financing option.
But times are changing.
Third party equipment finance companies – companies who offer small and medium size businesses equipment financing and working capital – have responded to a need for software financing and software leasing. Thus, they are starting to include software amongst the equipment they finance or lease. There is one big overriding reason for this shift:
The High Cost of Buying Software
The simple fact is this: Software can be very, very expensive. Oftentimes more expensive than the hardware that runs it.
Now, keep in mind that when we are talking about software in this way, we are generally talking about “vertical software”. Vertical software is software that is written for a specific, narrow industry (this can include industry-specific point-of-sale software, ERP systems, specialized databases, etc). It is not software that’s available on the shelf at your local office supply store (the software you see there, even the business programs and operating systems, are “horizontal software” – they can be used across a variety of industries, and are relatively affordable.)
A good, clear example of vertical software is an auto parts store – they use software that’s specifically written for the auto parts industry. Another example is your local jewelry retailer – they likely use a point-of-sale system specifically made for the jewelry industry.
To understand how software financing and software leasing can positively affect a business, it is important to understand the advantages of vertical software first.
For most businesses, Vertical Software usually means far more efficient business processes. In the case of an auto parts store, for example, the software will already anticipate the thousands of automobile makes and models. And will almost certainly be updated every year. The jewelry store’s software will differentiate the subtle differences between two diamonds by any number of categories. And so on.
In fact, these “vertical” software programs are so effective, and become so crucial to day-to-day operations, that businesses often need this type of software to remain competitive. In many cases, it’s not an option to do without.
However, since the software is so narrowly focused, it usually comes with a hefty price tag. The developer will sell relatively few copies as opposed to a word processing program (which will sell in the millions), so they must get a premium for their work. Vertical software can sometimes reach five figures for a single license.
This brings an obvious problem: “Businesses need the software, but it’s very costly to buy outright.”
And that’s where software leasing and software financing come in – business don’t have to “buy” it upfront.
The Advantage of Software Leasing and Software Financing
The advantage of financing or leasing software is clear:
Software leasing and software financing take the huge up-front cost of new software out of the equation. Like most other business equipment, software is now beginning to be seen as a tangible asset (this was not always the case.) This means software can largely be treated as any other equipment purchase in the case of financing or leasing. A business can finance that new ERP system instead of having to budget a huge cash outlay.
This can be very beneficial to the bottom line, as software generally pays for itself over time. In fact, since “vertical” software almost always reduces the cost of doing day-to-day business, leasing or financing said software can actually create a positive cash flow right away.
But Who Offers Software Financing or Software Leasing, and how does it Work?
It’s true that software developers have been very slow to embrace the business model of software financing or software leasing. They would prefer to be paid up front for their software.
Likewise, banks, being part of an “older” industry, are also largely reluctant to finance software.
However, third party equipment finance companies who specialize in small and medium sized business equipment financing often offer attractive software lease and software financing packages. What happens is the equipment finance company pays the developer in full, and then provides the software to the end user under a finance or lease agreement, often at very attractive rates. In all actuality, it’s fundamentally the same as financing or leasing most other equipment.
Of course, like any other financing, the agreements can (and will) vary from traditional fixed rate financing to a “software lease” with a buyout at the end, etc. And the rates and terms also vary – your individual equipment finance company will have more details.
All in all, software financing and software leasing have definitely entered the business consciousness, and because it is so friendly to the bottom line, it is a business model that is here to stay.
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May 11th, 2009 at 2:34 pm
May 11th, 2009 at 3:58 pm
I've been in Finance for so long that I've decided that I wanted to do a different degree that was along the lines of my future goals… Law. I did my BBA in Legal Studies. I was a Finance major at first. I will suggest that you stick with the Finance Major vs the Business Administration. I mean if you think about what exactly is the B.A. offering you when the bottom line of the degree is in Business Administration? To have a specialty gives you a 'know-how' that makes you more adept in taking on positions that offer stellar pay as Finance and Accounting is known for. Each person is different in terms of what they want to do with their future goals. I normally see students minor in Business Administration if their Undergraduate Degree is in a totally different realm. This is only to signal to the employer that you are versatile and have business skills. If you are a business student I suggest Finance if this is what you want. Finance is definitely interesting and keeps you on the toes not just in the sense of performing statistical analysis but also conducting market and financial research including technical analysis which keeps you in the loop of world news as much as national news. You begin to witness the chain in global commerce & media and how it effects one another and inevitably effects the market as well as consumers far and near.
Another point that comes to mind is the institution that is granting the Finance degree. What is their reputation in the Finance Department? Are they first class? Are they top-rated? Usually the "glamourous pay but slave to your job" are firms off of W-Street which hit Ivy league schools to join their Associate or Summer programs. These programs, once selected ..highly selective, gear you up for positions such as equity or fixed-income analysts. Again, the pay is here, the perks are there, but you get no life. If you're looking to have that lifestyle then ensure your alma-matter can deliver. Your grades will obviously have to stand on its own and well .. if you have connections then use them.
If you want something more exciting in Business then go for Marketing. I'm leaning to the Marketing aspect in my MBA program which will play instrumental in my Entertainment Law (Law, Marketing, Finance (Budgeting)).
Good luck with everything.
P.S. I suggest you take a few finance classes (required and as an elective) before you decide.
May 12th, 2009 at 12:49 am
a B.S. in Bus Admin is a useless degree
Finance is more banking/credit/loans/mortgages related
accounting is number crunching, financial statement prep, auditing
accounting is generally boring repetitive, often stressful
haven't worked in Finance field
FP/FA – mostly commission or salary with sales quotas – cold calling
May 13th, 2009 at 3:36 am
You'll need a good solid business plan and have figures and answers to back it up. Plus some money out of your own pocket.
May 13th, 2009 at 4:39 am
Traditional financing means your payments are the same every month for the life of the loan, e.g., $500.
In balloon financing, your payments will be lower, except at the end; this will be several times higher. In such an arrangement, your payment may be $350, but your final balloon payment might be $7000.
The latter type of financing is what trips up people, as they're able to make the smaller monthly payments at least until something happens – they lose their job, the economy turns sour, they have huge medical expenses, etc. Then they find themselves unable to make that balloon payment.
When exploring your options, have you crunched your numbers to be able to afford that car? (This is an important step in preparing for a big-ticked purchase.) Next, do you have enough money saved to be able to cover that balloon payment?
May 13th, 2009 at 10:09 am
Are you working with a Realtor? Ask them to suggest someone.
If not, Find a Mortgage Broker/Banker who can shop the market for you and find an investor who will finance you.
If you cant find anyone, I hope you made the offer contingent on you finding financing, if not, you are out of your earnest money when you back out.
Good Luck!
May 13th, 2009 at 11:58 pm
http://www.exinfm.com/free_spreadsheets.html
May 14th, 2009 at 4:58 am
what is wrong with a pen and paper works real great if the electric goes off!!!
May 14th, 2009 at 6:24 am
Set up a basic credit criteria, in which based on your clients credit score or certain qualifying options that you create, you base your credit line. Ok to make this easier, you could for example use a 90% credit line for clients whose credit score (or other certain criteria because companies sometimes don't look for a certain score but more or less other items they deem necessary) is 800 or more and it goes down from there…so as if a new client you have has a 500 score you could issue them only a 10% financing line. Second, after you set your standards, go ahead and work out your governing contracts, what is your interest rate (check with other similar companies in the field)? What is your late fee and when are payments due..how about penalties? Boy, that's enough for now huh!