This article was written for the Monitor newspaper by Mark S. Bazrod, President, LPI Software Funding Group and was published in the November/December 1995 issue.
Youíre a lease broker who originates a fair amount of computer equipment leases. Do you have to know anything about software leasing? You better, because most of your specialty, computer hardware leasing, is disappearing in dollar terms, in future residual value, and in the need for your services. As the pace of technological change has accelerated, hardware has become very much a commodity and it is software that now provides the bulk of value to the user. Software expenditures often exceed 50% of computer hardware and software acquisition costs. Yet while computer hardware represents more than 20% of the dollar value all leasing transactions, software represents less than 2%. You can expect the proportions to materially switch over the next 5 years.
So what is an computer lease broker to do in this environment? Obtain the ability to originate computer software leases! Today, there are only a few leasing companies which focus on this niche. LPI Software Funding Group, Inca. is one of the few who do. Thus, we can provide you with some up-to-date information about this market segment so that you may have a better idea of what is involved in software leasing and what opportunities exist. We expect that software leasing, now double the volume of prior years, will continue to substantially increase in the next few years.
What Is Software Leasing
From viewpoint of the user, it is just about the same as equipment leasing, except itís for an intangible, the software and the software license. It is a method of paying for software over time instead of a single upfront payment and the functional equivalent of a loan from the leasing company or the software developer.
From the viewpoint of the software developer, software leasing is a sales and marketing tool allowing software companies or developers to provide their customers with a lease financing alternative to an upfront cash payment. A software company offering leasing alternatives to its customers will usually experience an increase in revenues, a decrease in the sales cycle, and an increase in user satisfaction levels. The software company can either neutralize its competitorís ability to offer financing or it can obtain a competitive advantage by offering software leasing when the competitor does not.
In many cases, software is leased separately from hardware. But it is often leased along with the hardware and sometimes with installation, training, consulting services, custom programming, and maintenance.
What are the Benefits of Software Leasing to Users
Of course, software leasing will grow only if it benefits the users. In general, for large companies leasing is often a solution to capital budget delays; for medium-sized companies, it is a convenient method of financing; and for smaller companies, it is an excellent source of funds. A user will obtain all the normal benefits of leasing (eliminate or reduce capital budget delays, provide 100% financing tailored to its needs, preserve bank lines, better match revenues and expenses, etc.), plus software leasing often allows the user to obtain all the software, licenses, training, etc. that are needed now, and possibly allows the inclusion of consulting, hardware, and training costs in the lease. In almost all leases, the customer will own the license to use the software at the end of the lease.
What are the Forms of Software Leasing
Software leasing is often done through a capital lease, normally with $1 purchase option. However, some lessor or software companies use a promissory note, and others use an extended payment rider to the software license. Your choice of funding source will dictate which form you discuss with the user. In rare cases (other than from the vendor), a true operating lease may be used.
So When is Software Leasing Available to a User
We think a user can obtain a software lease if all or most of the answers to the following questions are "Yes": Does the software vendor offers financing? Does the user knows a leasing company which offers software leasing? Is the software cost greater than $25,000? Is the userís credit standing relatively high? Has the user leased hardware? Is the software license transferable?
If all or most of the "if statements" are true, software leasing is probably available. And it may be available even if most are not true. But software licensing issues will play a major part in credit approval, which means you should have a general understanding of some of the issues. Licenses come in many flavors. They may be exclusive, they may be transferable, they may be perpetual, there may be other limitations on use ( computer, affiliated companies, etc.), and they may be priced in unique ways ( by number of users, site, enterprise, or usage). One thing is sure - if the license is not transferable, it will require a better credit.
Some of the Issues for a User Considering Software Leasing
There are numerous business\management and documentation issues that a user must consider. That means that a knowledgeable broker should also understand these issues and obtain whatever information he can so that lease approval can be expedited.
A partial list of the business\management issues would include how the users budgeting system handle software, how the users accounting system handle software, installation, training, customization, etc., can the lease include hardware with the software, can the lease include installation, training, customization, etc. with the software, what does the user think is the value of software at the end of the lease, does the user want or need an operating lease for software ( true operating leases for hardware rarely make sense anymore and certainly do not for software).
A partial list of the documentation and legal issues would include will a lease or promissory note meet the userís needs, will the user be a licensee of the software company or a sublicensee of the lessor, will the document address the differences between software and hardware, can the lessor repossess the software, can the lessor stop the user from using the software, can the lessor obtain a security interest in the software, and is there a problem if the lessor obtains a security interest in the software.
As you can see, although software and hardware leasing are similar in their financial aspects, there are numerous additional considerations which you must understand if you want to offer software leasing to your user customers. However, we think the paradigm of the computer industry has shifted inexorable and it will be necessary for the computer broker of the 90ís (and beyond) to change with the industry and offer software leasing.
Therefore, the last question is how do you find a leasing company which will work with you in offering software leases. We suggest you call your usual leasing companies, search the Internet for "Software and Leasing", call the Equipment Leasing Association, or call LPI Software Funding Group.
© LPI Software Funding Group, Inc.
593 Cricket Lane, Suite 200 Wayne, PA 19087
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February 27, 2006