With the rise of As-A-Service options in the technology space, we often get the question whether Managed Service Providers (MSP), Unified Communications (UC) providers and System Integrators should partner with a leasing company to provide customers monthly payments, or fund it themselves.
These technology companies I talk to are great at building complex technology solutions for their customers, but can stumble when it comes to providing leasing and monthly payments. The consumption and subscription evolution is causing your clients to expect a monthly payment option. The question then becomes not if you should offer them, but how? Should you work with a third party leasing company, or use your own cash flow to fund your As-A-Service offer?
Obviously I work for a finance company, so I’ll claim my bias up front. That said, using a third party finance company isn’t the best option for everyone.
Offering As-A-Service: Partnering With Third Party Leasing Company vs. Financing Technology Yourself
Your clients may have come to expect a monthly payment option for their technology. So how do you go about building an As-A-Service solution that will work for both you and your clients? The most popular choices are partnering with a third party leasing and finance company, or self-financing in-house. To help you make a thoughtful decision, take a look at the pros and cons of each below.
Financing Your Customers' Technology and As-A-Service Solutions Yourself
Why would a MSP, UC Provider or System Integrator choose to use their own cash flow to finance technology to their clients? The primary motivation is to maintain the customer experience because they are in complete control. They are taking their own cash reserves or using a line of credit to pay for upfront costs like hardware, software, installation and professional services. Over the term of the agreement (typically 12 to 60 months) the client makes monthly payments through an As-A-Service model back to the MSP, UC or AV reseller.
Some technology providers will structure the finance agreement where they’ll recoup the cost of the solution after 6, 12 or 18 months, and the profit is for the remaining months of payments.
The Pros and Cons of Using Your Business Cash to Finance Technology to Customers
Becoming the financing provider as well as technology provider changes the relationship you have with the customer, and with that comes both positives and negatives.
Pros of Using Cash to Finance Technology:
- Additional income stream
- Recurring revenue
- Control of customer experience
Cons of Using Cash to Finance Technology:
- Risk of customers not paying
- Administrative burden
- Cash or credit lines tied up
Positives of Self-Financing Your Technology to Customers
Because you would add an interest charge to your payment, you would make more over the long term than you would in an upfront cash sale. An example would be the customer paying $10,000.00 upfront for your solution OR paying 36 payments of $350.00. Over the term you would make $12,600.00 which would be an additional $2,600.00 of profitability.
We all know recurring revenue is valued different than other revenue sources. Any financed contracts would be recurring income that you could count on for the life of the term. Not only does this make paying your bills easier, it could increase the value of your business.
Control of Customer Experience
Many MSP, UC or AV resellers don’t like the idea of giving up access and control of the customer experience to a provider they don’t know. With an arrangement like this, you have total control of the billing and structure of the contract. If you come across a unique situation or your customer has special billing requirements, you get to make the call on whether or not to do it.
Negatives of Self-Financing Technology to Customers
Risk of Customers Not Paying
Self-financing As-A-Service transactions can come with a large amount of risk. Instead of getting a lump sum from either a check or your finance company, you’re dependent on your customers paying you monthly to realize profitability. If the customer pays late, stops paying, or goes out of business, the profitability of that transaction is jeopardized and you may take a loss.
Although self-financing can bring more dollars in the door, there are costs associated with it as well. You now have to do financial modeling, underwrite credit, create documentation, book the necessary documentation, file the appropriate paperwork, bill, collect, and possibly litigate all of these contracts yourself. Depending on the extent of your financing program, this likely means hiring additional team members to focus solely on these tasks.
Cash or Credit Lines Tied Up
As mentioned earlier, in a self-financed As-A-Service model you would be using your own cash and/or credit lines to pay for these transactions. That means funding may not be available for additional headcount, marketing campaigns, or office expansions. Tying up your cash or bank lines also creates scalability issues. Eventually your credit line will max out or your cash will be gone. Then you’re stuck waiting for your customers to pay you back so you can pay your credit line down or build your cash reserves back up.
Partnering with a Third Party Financing Source for Your Technology and As-A-Service Solutions
Similar to self-financing above, when working with a third party financing source you offer your customer monthly payment options with anywhere from 12 to 60 months terms. However, the finance contract would be between your customer and the finance company instead of your customer and you. While there are a lot of options for third party financing companies out there, this could be anything from a leasing company to a local or large bank.
The Pros and Cons of Partnering with a Third Party Finance Company to Finance Technology to Customers
By partnering with a third party finance company, you are still selling and providing the solution to your customer, but you’re also introducing a new party into the relationship which can provide both positives and negatives.
Pros of Third Party Financing:
- Immediately profitable
- Reduced or no risk
- Hands off process
- Provides scalability
Cons of Third Party Financing:
- Less flexibility
- No finance income
- Another relationship to manage
Positives of Partnering with a Third Party Financing Source to Finance Technology to Customers
When a third party financing company pays you upfront for the solution, you are profitable from day one--just as you would be with a cash transaction. You typically have fewer Days Sales Outstanding (DSO) and there is no waiting until the customer makes enough monthly payments to break even. You are able to take the money you are paid from the financing company to pay the manufacturer or distributor for the solution, make yourself whole, and the rest is your profit or margins.
Reduced or No Risk
What happens if your customer goes out of business in this arrangement? With the finance agreement between your customer and the finance company, you bear no risk for the agreement. If the customer pays late, stops paying, or goes out of business, the third party finance company will be the one making collection calls, filing paperwork and ultimately taking a loss. In most cases, the technology reseller has zero financial liability for the contract. Talk to your finance provider to double check their policies.
Hands Off Process
Since your financing partner is writing the contract with the customer, they are also responsible for all of the administrative duties mentioned earlier. Everything from credit underwriting, documentation, booking the agreement, billing, collecting and any possible litigation is now the responsibility of your finance partner. Since they are finance professionals focused on building a solid portfolio, they will have more resources dedicated to these tasks.
Partnering with a third-party finance company is a sustainable and scalable option for your business. Since the finance company is using their funds to finance the transactions, you won’t have to worry about running out of cash or bank lines no matter how big your As-A-Service program gets!
Negatives of Partnering with a Third Party Financing Source to Finance Technology to Customers
With another party involved in the solution, there may be additional constraints on the transaction based on their needs. For a finance company, billing and collecting payments is paramount to their profitability. As a result, finance companies will have criteria for approving both customers and transactions to meet their systems and processes. Depending on how complex your solutions and programs are, you may not be able to create all the rules as you could with a self-financed model.
No Finance Income
The additional income made by the interest rate that was a positive in self-financing technology is now profit for the financing company instead. Finance companies make money by lending money out at a higher rate than they borrow it. That means it’s unlikely your finance partner is offering a 0% rate, and so that income will be the finance company’s to keep.
Another Relationship to Manage
A finance partner is no different than any of your other vendors. Like software companies, equipment manufacturers, and distributors, they want your time and business. Your finance provider will have different strengths, weaknesses, value-adds, and cultures than their competitors and peers. You will need to set aside time to find the best partner for you and your customers, then build and manage a relationship with them.
[link here on what to look for in a finance provider]
So, is self-financing or partnering with a third party leasing company the right choice?
The short answer is, it depends. What risks are you willing to take and what do you want the focus of your business to be? How much cash do you have in reserves or available in bank lines? Do you have the staffing and knowledge to facilitate a finance program? If you’re okay taking on the risks, administrative burden, and additional time it will take to offer your own in-house option, it might be the right choice for you.
In reality, most small and medium businesses don’t have the resources or expertise to build and manage a quality finance portfolio. Cash flow is king, and when you’re putting money out the door with no return for 18-24 months, you could be putting your business at serious risk. All things considered, it’s a decision that each business owner has to make for themselves.
For more information or to continue examining different financing options for As-A-Service, check out this eBook, Alternatives to Traditional As-A-Service.
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