The very terms “software leasing” and “software financing” are confusing to many businesspeople. This is due to the fact that software is typically not seen as something that is bought over time.
This view is shared by both end-users, and the developers of software. Companies who think nothing of financing a car or a new personal system will stress over how they will pay for pricey new business software. And the producers of software see no need for offering a software leasing or a software financing option.
But times are changing.
Third celebration equipment finance companies – companies who offer small and medium size businesses equipment financing and working capital – have responded to a need for software financing and software leasing. Thus, they are starting to include software amongst the equipment they finance or lease. There is one large overriding reason for this shift:
The High Cost of Buying Software
The easy fact is this: Software can be very, very expensive. Oftentimes more pricey than the hardware that runs it.
Now, keep in mind that when we are speaking about software in this way, we are generally speaking about “vertical software”. Vertical software is software that is written for a specific, narrow industry (this can include industry-specific point-of-sale software, ERP systems, specialized databases, etc). It is not software that’s acquirable on the shelf at your local office supply store (the software you see there, even the business programs and operating systems, are “horizontal software” – they can be used crossways a variety of industries, and are relatively affordable.)
A good, clear example of vertical software is an auto parts store – they use software that’s specifically written for the auto parts industry. Another example is your local jewelry retailer – they likely use a point-of-sale system specifically prefabricated for the jewelry industry.
To comprehend how software financing and software leasing can positively affect a business, it is important to comprehend the advantages of vertical software first.
For most businesses, Vertical Software usually means far more efficient business processes. In the case of an auto parts store, for example, the software will already expect the thousands of vehicle makes and models. And will nearly certainly be updated each year. The jewelry store’s software will differentiate the subtle differences between two diamonds by any number of categories. And so on.
In fact, these “vertical” software programs are so effective, and become so crucial to day-to-day operations, that businesses often need this type of software to remain competitive. In many cases, it’s not an option to do without.
However, since the software is so narrowly focused, it usually comes with a hefty price tag. The developer will sell relatively few duplicates as opposed to a word processing program (which will sell in the millions), so they must get a premium for their work. Vertical software can sometimes reach five figures for a single license.
This brings an obvious problem: “Businesses need the software, but it’s very pricey to buy outright.”
And that’s where software leasing and software financing come in – business don’t have to “buy” it upfront.
The Advantage of Software Leasing and Software Financing
The advantage of financing or leasing software is clear:
Software leasing and software financing take the large up-front cost of new software out of the equation. Like most other business equipment, software is now beginning to be seen as a tangible quality (this was not always the case.) This means software can largely be treated as any other equipment buy in the case of financing or leasing. A business can finance that new ERP system instead of having to budget a large cash outlay.
This can be very beneficial to the bottom line, as software generally pays for itself over time. In fact, since “vertical” software nearly always reduces the cost of doing day-to-day business, leasing or financing stated software can actually create a positive cash flow right away.
But Who Offers Software Financing or Software Leasing, and how does it Work?
It’s true that software developers have been very slow to embrace the business model of software financing or software leasing. They would like to be paid up front for their software.
Likewise, banks, being part of an “older” industry, are also largely reluctant to finance software.
However, third celebration equipment finance companies who specialize in small and medium sized business equipment financing often offer captivating software lease and software financing packages. What happens is the equipment finance company pays the developer in full, and then provides the software to the end individual under a finance or lease agreement, often at very captivating rates. In all actuality, it’s fundamentally the same as financing or leasing most other equipment.
Of course, like any other financing, the agreements can (and will) vary from traditional fixed rate financing to a “software lease” with a buyout at the end, etc. And the rates and terms also vary – your individual equipment finance company will have more details.
All in all, software financing and software leasing have definitely entered the business consciousness, and because it is so friendly to the bottom line, it is a business model that is here to stay.
