ss_blog_claim=bd50edc517cf0b7549fe6b5f63b6b5f8 The SLS Business Finance Blog: January 2008

Wednesday, January 9, 2008

Financing Technology Part 1: Software Licenses

Can you really finance software??

That's a question I was asked recently and the answer is YES. However, in order to do so, it pays to understand how software is sold. Most of us don't think about it cause when we need Microsoft Office for our computers, we either go to a store that sells it and buy the little box with disc enclosed or we get it loaded into our computers when purchased (or custom built). The reality is that software is sold in 2 forms:

1) License
2) Software as a Service (known as SAAS)

When software is sold as a service, that means we pay monthly for use of the software. One of the best known companies for this is Clients pay a monthly usage fee to use their software to manage data in various parts of the sales process. The plus side is no big up front cost. The downside is having to pay every month and some companies feel uncomfortable about not ever owning the software they use to manage such vitally important data for their business. As of this writing, software created and sold in this format cannot be financed even though it helps us to better understand what we can finance.

The other major form of software sales is by license. This is otherwise known as "Off the Shelf" or "Prepackaged" software. This means we pay a one time fee per user in order to license (get approved use) of proprietary technology. So we need to pay Microsoft a fee per user to have the right to create spreadsheets on whatever topics we feel like on Excel. However, once we pay, we own it. Licenses are sold per user/per desktop where the software will be required. For most software, that means every computer in use by a business so even at a cost of $100 per license, this can run into big money. Microsoft, Sage, and Adobe are 3 of the largest software companies whose software is licensed. Licensed software CAN be financed.

100% of the license fees for software can be financed over typically a 1-4 year period with 3 years being the average. Each of these financings is structured as a $1 Residual (buyout at end of term) whether its a Capital Lease or an EFA (Equipment Finance Agreement). This allows for every interested party in the software to help expand (or make more efficient) their business by acquiring the software when they need it and pay for it over time and own it.