SOFTWARE LEASING & FINANCING


This outline was used by Mark S. Bazrod, President, LPI Software Funding Group, Inc., for his June 9, 2005 presentation on software leasing at the 25th Annual World Leasing Conference held in Istanbul. If you want the PowerPoint presentation, please send an email to msb@lpilease.com.



THE QUESTION

Should You Finance Software, an Intangible Asset You Probably Don't Have the Right to Remarket, and You and Your Funding Sources Will Have to Spend a Substantial Time to Understand the Software Business?

THE ANSWER - YES!!

Software leasing has great potential

There is less competition

The risk is less than perceived

Software is an essential asset - the lessee can't operate its business without software

Software doesn't depreciate in value

The software industry needs lessors knowledgeable in the business

LPI'S MOVE TO SOFTWARE

LPI has focused on software leasing since 1992 - after the CEO's 23-year history in computer operating leases

Took a year to figure out how

There are more than 40,000 software developers in the US

Few offer leasing to customers

Spent large effort to make developers aware of LPI & software leasing

WHAT IS SOFTWARE LEASING?

It is a financing, not an operating lease

It can cover software and related costs on 1 to 5 years terms

Documents can be in the form of loan or lease

Lessee normally has title to license

It can be secured or unsecured

Default remedies have to be extended to cover use of software and support

Similar to conditional sale equipment leasing

WHAT IS THE SCOPE OF SOFTWARE LEASING?

Most users not aware software can be leased
Most developers also not aware
Only 25 lessors offer 100% software leases - and most only for investment grade users
50% of software companies with revenues > $10 million offer some form of financing, mostly deferred payment
Less than 20% of software companies with revenues < $10 million offer financing
Most banks will only finance software for investment grade users, unless good customer

 

SOFTWARE LEASING STRUCTURES

Capital lease, normally with $1 purchase option
Promissory note
Extended payment rider to the software license
Operating lease sometimes available from the developer – rare

UNDERSTANDING THE SOFTWARE INDUSTRY

50+ market segments
40,000+ companies in U.S.
Are you software vendor or lessee oriented?
Must understand software licenses
If you want to talk to vendors, you better understand the industry

UNDERSTANDING THE SOFTWARE INDUSTRY

Statistics vary widely, but large size of software industry is unmistakeable
IDC 2002: US $68 Billion; Global $169 Billion
SIIA 2005: US companies $103 Billion
OECD 1995: US $118 Billion; Global $249 Billion
OECD 1998: US total $152 Billion; US prepackaged $31 Billion
BSA 2002: Global total $227 Billion; Global prepackaged $95 Billion
BSA 2005: Europe $120 Billion

U.S. SOFTWARE COMPANY PROFILES

Number of Companies  -  25,000 - 50,000
Company Size

85% - 90% Have Revenues Less Than $25 Million
75% Have Less Than 50 Employees

Company Ownership  -  80% Are Private


SOFTWARE LEASING TRENDS

Small ticket - just like rest of small ticket
Large ticket investment grade - Similar to investment grade leasing
Middle market – Only a few lessors
Software leasing keeps increasing - Until recently growth has been very gradual. WHY?
Software is more costly and more essential than hardware

WHAT ARE THE BENEFITS TO VENDORS AND USERS?

Vendor - Normal benefits of vendor program
User - Normal benefits of leasing

LEASING COMPANY ISSUES

Are you prepared to educate your financing sources?
Do you believe software has value?
Do you understand the software industry?
Do you understand software licensing?
Do you understand software legal issues?
Do you really want to finance software?

EDUCATING YOUR PEOPLE & FINANCING SOURCES

Probably is your major hurdle
Is it worth more than hardware?
Can you obtain a lien/charge/mortgage/security interest in software or are you making an unsecured loan?
Does it matter whether it is unsecured?
License provisions are important - Any prohibitions on lessor lien? Nontransferable? Exclusive? Perpetual?
Should you finance services?

SOFTWARE “REMARKETING”

You can’t repossess the software
You can stop the lessee from using the software
You normally can’t remarket the software
Will the software company remarket for you? -
Probably not!
If a reorganization, you may come out O.K. –
if you are secured.
If a liquidation, total write-off

LESSOR REMEDIES

Terminate the licensee’s right to use the software
Terminate support (but be careful of liability to vendor)
Obtain the software
Do you need vendor assistance?

CONCLUSIONS


1.   SOFTWARE LEASING IS WORTHY OF CONSIDERATION
2.  IF YOU FOCUS ON CREDIT, COLLATERAL MAY BE IMMATERIAL
3.  ENTERING SOFTWARE LEASING WILL MEAN A SIGNIFICANT ALLOCATION OF RESOURCES
4.  EDUCATING YOUR PEOPLE & FUNDING SOURCES IS KEY

© LPI Software Funding Group, Inc.  

593 Cricket Lane, Suite 200     Wayne, PA 19087  

610.687.4434      610.341.6100   sales@lpilease.com
                         February 27, 2006