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 firstname.lastname@example.org.
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 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
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
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
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?
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
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?
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 email@example.com
February 27, 2006