By: Taylor McDonough on May 6th, 2020
Everything You Need To Know About Software Financing
There are many words I could use to describe the year 2020, however the one that sticks out the most is CHANGE. We are living in a world of change. The way we communicate is changing, the way we do business is changing…heck, even the way we have drinks with friends is different (although, I do love virtual happy hour).
So how does this relate to software financing?
In the past two months, IT and Office Technology Providers were on the front lines. Without much warning, they took on the challenge of deploying their clients’ remote workforce at record pace. A majority of projects were put on hold, and IT Providers worked around-the-clock to ensure their clients could continue doing business securely from home.Today, a majority of projects are still on hold due to social distancing guidelines, as most IT Providers are unable to enter their clients’ offices. However, they are staying busy with software migration, implementation, and upgrades which can be done remotely.
Clients may be hesitant to spend their cash on costly IT projects though, as they realize how important cash is to the financial well-being of their business (especially in times of economic uncertainty). Enable them to invest in necessary technology upgrades via affordable monthly payment options. This shows you are mindful of the current climate and have proactively sought out finance solutions for them. Which brings us to…software financing.
Can my customer finance a software purchase?
Yes, in many cases, acquisition or licensing of software can be financed under a special finance agreement. However, not all software will qualify for financing.
What does GreatAmerica look for when deciding whether or not to finance software?
There are a number of factors used when determining whether a specific software is a good fit for financing. Here are a few of them:
Software Company is Established
Since software many times is heavily supported by the developer, it is an important first decision point. For example, it is unlikely we would feel comfortable financing a crowd-funded startup company who’s developed version one of their software. Conversely, we are very comfortable financing Microsoft 365 or VMware.
Software is Essential Use for the Customer
The next thing our team considers is how essential the software is for your customer. For example, practice-management software for a medical office or document management software for a legal office.
How the Software is Acquired
How the software is acquired is another critical aspect for us to understand. Is it a software that you purchase once, download to a device and own forever? Is it an upfront fee for a perpetual license, or perhaps a term license? Those are all cases where financing is favorable. The caveat on the term license is the finance agreement cannot be longer than the term of the license. Another thing we see often is when a software platform offers a discount for an upfront commitment. For example, it is $10 per month, but if you buy a year in advance it is only $100. Many times it makes sense to take advantage of the discount. Software platforms that are sold month-to-month or cancellable aren’t a good fit.
How the Software is Deployed
The final major consideration is how the software is deployed to your customer. Ideally the software will be deployed to a server or device owned by your customer, either on-premise, or in a data center. If the software is accessed via a connection to a manufacturer or provider hardware platform, it requires a little more research.
Can my customer finance software development?
Software development can be tricky. With software development, many times you are paying for a future state, regardless of the outcome. Because of the risk involved and heavy reliance on the software developer to perform, GreatAmerica currently only finances development in very few, unique situations.
Can my customer finance labor or software migration?
Generally speaking, GreatAmerica will finance the labor associated with deploying the software and/or software migration as part of a software finance agreement. We typically do not finance labor only projects.
Is a different finance agreement used for software?
If the transaction involves primarily the financing of software, GreatAmerica generally uses a software finance agreement. If the transaction is primarily an equipment deal, we typically use a lease (e.g., with a fair market value or $1 purchase option), a rental agreement, or an equipment finance agreement.
What is the difference between a software finance agreement and a lease agreement?
In both cases, your customer, the company who will be using the hardware or software, is obligated to make regular scheduled payments.
The major difference between the typical leases we offer for equipment and a software finance agreement is that in a lease GreatAmerica owns the equipment and grants your customer the right to use the equipment. However, with software, neither your customer nor GreatAmerica owns the software. Rather, the software company owns the software, and your customer is merely seeking a license to use the software. Accordingly, in a software finance agreement, GreatAmerica is providing financing to your customer to acquire a license to use the software.
Because of the fundamental differences between a lease and a software finance agreement, here are some things that work differently:
- You would add applicable sales tax on your invoice to your customer and we would fund you for the full amount of the invoice, inclusive of the taxes. You are then responsible for paying such taxes to the respective taxing authorities.
- If your customer purchased a perpetual software license, then after the final scheduled payment is made to GreatAmerica, your customer will continue to use the software free and clear of any lien by GreatAmerica.
- If your customer purchased a term/subscription-based license, then GreatAmerica could work with you and your customer in financing their next software solution.
Incorporate Financing into Software Discussions
Now that you know a little more about software financing, add it to your tool belt. It’s another way for your MSP clients to affordably upgrade their technology amidst uncertain times. If you have additional questions about software financing and how it works, our team would be more than happy to help. Reach out to us!
Taylor McDonough is a Director of Vendor Relationships in our IT and Communications Unit, where she also directly supports the IT Nation Evolve community. Taylor started at GreatAmerica in the marketing department, where she identified her passion for helping customers reach their business goals.