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SOFTWARE LEASING FOR
TECHNOLOGY COMPANIES

First, Understand Software Licensing Issues
  • Is is exclusive?
  • Is it transferable?
  • Is it perpetual?
  • Are there other limitations on use - computer, affiliated companies, etc.?
  • How is it priced - by number of users, site, enterprise, or usage?
  • What upgrades or new releases are you entitled to?

What is Software Leasing to the User
From the viewpoint of the user, it is just about the same as equipment leasing, except it's 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 software developer. It is structurally normally a capital lease rather than an operating lease. However, it is often accounted for as an operating lease.

What is Software Leasing to the Developer
From the viewpoint of the software developer, software leasing is a sales and marketing tool which provides users with a lease financing alternative to an upfront cash payment. Leasing often results in an increase in revenues, a decrease in sales time, and an increase in user satisfaction levels.

In many cases, software is leased separately from hardware. In many instances it is leased along with the hardware and sometimes with installation, training, consulting services, custom programming, and maintenance.

Lease Transaction Overview

What are the Forms of Software Leasing
  • Capital lease, normally with $1 purchase option
  • Promissory note
  • Extended payment rider to the software license
  • In rare cases (other than from the vendor), an operating lease

How Do the Banking and Leasing Industries View Software Leasing
  • 47% of software companies with revenues over $10 million offer some form of financing for their software licenses; only 23% where revenues under $1 million.
  • But only about a dozen leasing companies offer 100% software leases, and most only for investment grade users.
  • Most banks will only finance software for investment grade users.
  • Major hurdle has been psychological resistance of banks and leasing companies - they do no appreciate the value of software.
  • Thus, growth in software leasing has been gradual, but is now positioned to grow substantially. Computer equipment represents 20% of equipment leased, but software is less than 2%.

So When is Software Leasing Available to a User
  • If the software vendor offers financing
  • If the user knows a leasing company which offers software leasing
  • If the software cost is greater than $25,000
  • If the user's credit standing is relatively high
  • If the user has leased hardware
  • If the software license is 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.

What are the Benefits of Software Leasing to Users
  • Normal benefits of leasing
    Eliminate or reduce capital budget approval delays
    100% financing
    Preserve bank lines - or eliminate the need for a line
    Easy to subsequently add or upgrade hardware, licenses, and consulting
    For the highly-rated user - solution to capital budget delays
    For the medium-rated company - convenience
    For the low-rated company - an excellent source of funds (maybe)
  • PLUS
    Obtain all the software and licenses that are needed now
    Consulting, hardware, customization, and training costs can be included in the lease
    User owns the license to use the software at the end of the lease

How Do I Find a Software Leasing Company
  • Search the Internet for "Software and Leasing"
  • Call your usual leasing companies
  • Call the Equipment Leasing Association
  • Call LPI Software Funding Group (See below)

What are the Basic Functions of a Leasing Company
  • Fund user purchases in return for payment over time
  • Take credit risk and software/hardware risk
  • Provide tailored solutions to user's needs
  • Permit the vendor to offer the user extended payment terms
  • BUT IS THE LESSOR PREPARED TO FINANCE SOFTWARE PURCHASE?

Some of the Issues for a User Considering Software Leasing
  • Business/Management Issues
    How does your budgeting system handle software?
    How does your accounting system handle software?
    How does your accounting system handle installation, training, customization, etc.?
    Can you include hardware with software?
    Can you include installation, training, customization, etc. with software?
    What do you think is the value of software at the end of the lease?
    Should you arrange an operating lease for software?
    Operating leases for hardware rarely make sense anymore!
    How do you find a software leasing company?

  • Documentation/Legal Issues
    Will a lease or promissory note meet your needs?
    Will you be a licensee of the software company or a sublicensee of the lessor?
    Does the document address the differences between software and hardware?
    Can the lessor repossess the software?
    Can the lessor stop you from using the software?
    Is there a problem if the lessor obtains a security interest in the software?

    © 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