This article was written by Mark S. Bazrod for the Greater Philadelphia Technology Council newspaper called Technology Times.
Software leasing is a sales and marketing tool allowing software companies or developers to provide their customers with a lease financing alternative. It is a method for paying for software over time instead of a single upfront payment and the functional equivalent of a loan from the leasing company to the user. A software company offering leasing alternatives to its customers will usually experience an increase in revenues and a decrease in the sales cycle.
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%. Why not at least 20%? One reason is that the larger software companies tend to offer leasing, but most of the smaller companies, which represent the overwhelming bulk of the industry, do not. Price Warehouseís 1994 Software Business Survey indicates that only 23% of software companies with revenues of less than $1 million offer leasing or financing plans, as compared to 47% of software companies with revenues exceeding $10 million. Equally important is that there has been a paradigm shift in the computer industry and it is difficult for many, particularly in the leasing and banking industries, to adjust their businesses to the fact that hardware has become very much a commodity and it is software that now provides the bulk of value to the user. We at LPI Software Funding Group expect that software leasing, now double the prior yearís volume, will continue to substantially increase in the next few years and find that those companies that offer it are now benefiting significantly.
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.
Aside from these generalizations, leasing often allows the customer to obtain all the software licenses, training, etc. that are needed now, eliminates or reduces capital budget delays, provides 100% financing tailored to its needs, preserves bank lines, better matches revenues and expenses, and possibly allows the inclusion of consulting, hardware, and training costs in the lease, all often through relatively simple documentation. In most leases, the customer will own the license to use the software at the end of the lease.
For the software company, leasing can increase both its average sale and its overall sales, shorten its sales cycle, expand its customer base, better satisfy customer needs by tailoring the lease to the customerís specific needs, improve its competitive and financial position and positively affect its competitive advantage. The software company can either neutralize its competitorís ability to offer financing or leasing or it can obtain a competitive advantage by offering software leasing when the competitor does not.
The software leasing company should be able to provide the developer with marketing support and enable upgrades or additional licenses to be easily and quickly obtained. In effect, the developer obtains an extensive financing program with no financial obligations on its part and avoids the necessity to obtain bank lines to carry a lease financing or to establish lease billing and financial lease accounting systems.
Assuming a software company concludes that software leasing provides significant benefits to its customers and itself, can the software company find a software leasing company and establish a close working relationship? We think it can if all or most of the answers to the following questions are "Yes":
Is your average sale greater than $10,000? Are your annual sales greater than $3,000,000? Have you been in business more than three years? Do you sell direct to the user? Are your customers of relatively high credit quality? Do your customers normally lease hardware? Do your customers have budget limitations? Do your customers have financing limitations? Is your license transferable? Have you ever leased software or hardware - either as a lessor or a lessee? Do you have the time to explore software leasing with a leasing company?
If the above criteria are met, then it probably pays for the software company to investigate software leasing as a means to grow its business and satisfy its customers needs.
© LPI Software Funding Group, Inc.
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February 27, 2006