SOFTWARE LEASING IN A
MUNICIPAL ENVIRONMENT

This outline was used in a presentation to the attendees at the Amembal & Halladay Municipal Leasing Conference in Chicago on August 30, 1995 by Mark S. Bazrod.

When is Software Leasing Available to a Municipality

  • 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 municipality - solution to capital budget delays
    For the medium-rated municipality - convenience
    For the low-rate 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 PURCHASES?

What Is Software Leasing

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.

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.

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 Forms of Software Leasing

  • Capital lease, normally with a $1 purchase option
  • Promissory Note
  • Extended payment rider to the software license

What is the Scope of 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
  • Thus, growth has been gradual
  • 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 hurdles has been psychological resistance of banks and leasing companies

Some of the Issues for a Leasing Company Considering Software Leasing

  • Do you believe software has value?
    Is it worth more than hardware?
    Can you obtain a security interest in software?
    Is software leasing unsecured lending?

  • Do you understand the software industry?
    What market segments are you interested in?
    What companies are you interested in?
    Are you a vendor or lessee oriented?

  • Are you prepared to revise your lease (or loan) documents?
    Lease or promissory note?
    Are you a licensee/sublicensor?
    Usury laws
    Language revisions relating to software legal issues
    Language revisions relating to software business issues

  • Are you prepared to reeducate your funding sources?
    Can you give a security interest in software?
    Does your source think it is making an unsecured loan?
    Language revisions relating to software legal 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 remarketing?
    Can you repossess the software?
    Do you have the right to do remarketing?
    Can you remarket (from a business standpoint)?
    Will the software company remarket for you?
    Will the software company guarantee remarketing?
    Who suffers the loss from default?

© 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