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Take A Giant Step In Understanding How To Finance Your Computer , Software and Other Technology Needs
Many companies are not aware of the significant benefits related to computer hardware financing , as well as available software finance solutions . The proper term for this type of financing is ' Technology life cycle management '. Most business owners simply consider the following question : ' Should I buy or lease my firms new computers and software and related products and services ? '
Two old adages related to leasing still ring true when it comes to the technological aspect . That is that one should finance something and depreciates, and one should buy something that appreciates in value . Most business owners, and consumers as well know very well that computers depreciate in value . Systems we paid thousands of dollars for years ago are now hundreds of dollars . Walk into any ' big box ' retailer and see the dramatic moves in technology .
Business owners who finance technology demonstrate a higher level of cost effectiveness . The company wants to reap the benefits of the technology over the useful life of the asset , and , importantly, more evenly match the cash outflows with the benefits . Leasing and financing your technology allows you to stay ahead of the technology curve ; that is to say you are always using the latest technology as it relates to your firms needs .
Businesses that lease and finance their technology needs are often working better within their capital budgets . Simply speaking they can buy more and buy smarter .
Many companies that are larger in size have balance sheet issues and ROA ( ' return on assets ' ) issues that are compelling . They must stay within bank credit covenants and are measure often on their ability to generate income on the total level of assets being deployed in the company . Lease financing allows those firms to address both of those issues . Companies can choose to employ an ' operating lease ' structure for their technology financing .
This is more prevalent in larger firms, but works almost equally as well in small organizations . Operating leases are ' off balance sheet ' . The firm adopts the stance of using technology, not owning technology . The lessor/lender owns the equipment, and has a stake in the residual value of the technology .
The main benefit for the company is that the debt associated with the technology acquisition is not directly held on the balance sheet . This optimizes debt levels and profitability ratios .
Little-Known Factors That Could Affect Your Computer Hardware Financing
At the end of those operating leases, which are usually 36 months long, the customer has the option of:
1. Returning the equipment
2. Buying the equipment ( not likely though )
3. Negotiating an extension of the financing for continued use of the computers, technology, etc .
Make Computer Hardware Financing Work for Your Company
Companies that have recently acquired computers and technology can in fact negotiate a' sale leaseback ' on those same assets. This financing strategy brings cash back into the company , as the firm has employed a leasing and financing strategy building on our above noted them - using technology, not owning technology .
Benefits of Computer Hardware Financing
In summary , the key benefits of computer and technology lease financing are :
* The company can stay ahead of the technology curve
* Computer leasing and financing has significant balance sheet and income statement benefits
* The firm has flexibility with respect to buying new product, returning existing technology, and generating cash flow for purchases already made
Many of the benefits we have discussed relate to leasing in general . However, technology and lease financing are very perfectly suited to the business financing strategy of leasing .
Many businesses, both small and large do not realize that software can be leased or financed . Although software financing is unique in some manner, in general it has many similarities to equipment leasing.
It is also proper to ensure that right finance firm is utilized , as many lenders are somewhat risk averse to financing this asset . However, many others are looking for business in this area !
Contrary to popular opinion software as an asset in many cases has more value that a depreciating hard asset . It has also been confusing for lenders when it comes to the registration of collateral under Canadian PPSA ( PERSONAL PROPERTY SECURITY ACT ) legislation .
In its broadest term the financing or leasing of software that can't be transferred to another user . The business owner does also of course not own any development rights in the software . Software financing is treated as a financing mechanism, it is not a true lease per se .
Some additional key points around the technicality of software leasing/finance are as follows :
The right of a customer to use the software gives the company no right in the intellectual property surrounding the developers rights in the software code. The best example of this is when we look at our EXCEL spreadsheets that we use in finance and home matters . We use the software, but Microsoft of course owns it .
The problem in the past around the financing of software revolved around the fact that lenders did not know how to collateralize and register their security . Under current PPSA legislation intangibles and software can be collateralized. Therefore the software financing lender/lessor can be very confident that the software can be secured.
At the heart of the software financing issue is the true value of the software to the business owner . He runs his business on it , i.e CRM programs, office software, manufacturing software, etc. Software lease payments tend to be made since the asset is indispensable to the value and on going concern of the business . Unless companies are liquidated in total bankruptcy most lessors and finance firms recover fully on their software leasing - Source - Journal of Equipment Leasing
In many business bankruptcies the software lessor or lender is treated as a secured creditor .
Also key to the software financing issue is that many software firms offer maintenance , support, and updates around their product . This enhances the lenders asset as it is used for longer lengths of time, and often constantly upgraded. Quite frankly it becomes less obsolete than computer hardware!
Many software lessors and lenders also finance the service and maintenance contracts associated with their customers software acquisition.
We do acknowledge in this article that it is more difficult to finance customized software although it is possible based on the overall credit strength of the borrower . Many customized software deals are done with only investment grade borrowers where credit risk is minimal . Many smaller ticket lessors and lenders however do now lease software . In general these transactions are full payout capital leases .
In summary , software lease financing is available and should be considered by every business owner in the same context as a capital equipment finance transaction . The computer hardware industry has grown with leasing , and the software industry is doing that also . The same considerations an owner gives to lease vs buy apply to a software finance acquisition .
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