WHAT IS THIS THING CALLED SOFTWARE LEASING

Mr. Mark S. Bazrod, President of LPI Software Funding Group, Inc. furnished this outline as part of a presentation in November, 1995 at the Amembal, Deane & Associates Conference on Issues in Equipment Leasing: A Lessee Perspective.

What is Software Leasing
From the viewpoint of the customer, 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. It is structurally normally a capital lease rather than an operating lease. However, it is normally accounted for as an operating lease.

From the viewpoint of the software developer, software leasing is a sales and marketing tool which provides customers 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 customer 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, consulting services, custom programming, and maintenance.

What are the Form 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
  • Most banks and leasing companies do not appreciate the value of software
  • Thus, growth has been gradual
  • Most users are not aware that software can be leased
  • 45% of software companies with revenues over $10 million offer some form of financing
  • Only about a dozen leasing companies offer 100% software leases
  • Major hurdle has been psychological resistance of banks and leasing companies

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 event 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 need for a line
  • Easy to subsequently add or upgrade hardware, licenses, and consulting
  • For the highly-rated municipality - solution to capital budget delays
  • For the medium-rated municipality - convenience
  • For the low-rated municipality - 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

What are the Basic Functions of a Leasing Company
  • Fund customer purchases in return for payment over time
  • Take credit risk and software/hardware risk
  • Provide tailored solutions to customers needs
  • Provide a vendor the ability to offer the customer extended payment terms without having to finance the payments
  • BUT IS THE LESSOR PREPARED TO FINANCE SOFTWARE PURCHASE?

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

Some of the Issues for a User Considering Software Leasing
Do you believe software has value?

  • Should you arrange an operating lease?
  • What is the value of software at the end of the lease?
  • How does your budgeting system handle software?
  • How does your accounting system handle software?
  • How does your accounting system handle installation, training, etc.?
  • How do you find a leasing company?

How do you document the financing of the software license?

  • Lease or promissory note
  • Are you a licensee of the software company or a sublicensor of the lessor?
  • Software legal issues
  • Software business issues

Do you understand software licensing?

  • Is it exclusive?
  • Is it transferable?
  • Is it perpetual?
  • What are the other limitations on use?

Do you understand software financing?

  • 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?
  • Can you include hardware with the software?
  • Do you understand why operating leases rarely make sense anymore?

© 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