It is pretty hard to look at any websites about software without noticing that more and more software these days is sold as SaaS.
(SaaS means "software as a service" for those who hate acronyms...)
It's not your imagination:
SaaS demand at the enterprise level is growing at 17.6%. Even lower priced software such as Microsoft Office and Photoshop is often now being sold under a monthly payment model.
Before entering into a SaaS contract, often, businesses have three important issues to consider:
- Software is often quoted on a monthly basis, but many SaaS contracts require one year (sometimes three) of payments in advance.
- For software solutions that require extensive customization, many enterprise software providers (and consultants) require proof that your company can pay for the contract before getting started on your build out.
- In a huge number of cases, substantial discounts can be reaped by paying multi-year contracts in advance.
Let's go over some scenarios and discuss how leasing cloud software can be implemented, along with when it makes sense to do so.
Special Note: If you are a SaaS consultant, salesperson or company looking to provide financing for your customers, we can implement custom solutions to make your job easier. Please see this article about vendor financing to learn how we can help you sell more product.
Can Leasing a SaaS Contract Preserve Working Capital?
For an easy example, consider implementation of an enterprise level CRM such as Salesforce.
While some smaller companies can make do with low-tiered pricing options, many businesses will need editions that cost $125+ per "seat."
With 100 seats, that's a rather manageable outlay for most 100+ person companies at $12,500 per month. However, like most SaaS applications, Salesforce contracts are billed annually.
That's $150,000 to start - but also keep in mind that you're unlikely to be able to implement a solution like Salesforce without help. Most companies will need to hire a consultant, easily adding $25,000 or more to the price.
That's $175,00 plus - a whole lot of Shekels....
Many companies are unaware that that SaaS Contract Financing can often ease the sticker shock.
For a relatively trifling amount, equipment leasing can turn a large one-time expense into a monthly expense.
How does Cloud Software Leasing Work?
When most people think of equipment leasing, they imagine financing large and expensive equipment such as airplanes or heavy trucks.
It is relatively easy to get large expensive machines financed or leased because if payments aren't made, the items being financed can be repossessed and resold.
The truth is, most equipment leasing companies do not entertain requests to lease cloud software simply because it's more esoteric and harder to wrap one's arms around.
Here at Smarter Finance USA, however, we have a great funding partner that specializes in financing intangible assets such as SaaS contracts.
Saas Financing requires generally higher credit quality than most other forms of financing because there is no "asset." This obviously makes the transaction a little bit riskier than some other deals a leasing firm may contemplate.
With that being said, in many cases companies with strong credit and financials can finance a service contract for software. Very well qualified companies may find the total costs for these transactions astonishingly low.
For example, consider the example above, financing a one-year contract plus consulting for $175,000.
In some cases, the monthly payments could be $15,150 per month.
What is the total cost of financing in this case?
$15,150 X 12 = $181,800
$181,800 - $175,000 = $6,800
In essence, the cost of implementing a solution...
(while avoiding pointing a flamethrower at your company's cash reserves...)
...is $6,800, or roughly 3.9% of the financed amount.
Since most companies don't just have large piles of cash they don't need, 3.9% is likely a fair tradeoff for many.
Note: Payment amounts will be risk based, and not all companies would see payments that low on a transaction like that.
In some cases payments could be as high as $15,750 or more monthly - but usually not a huge amount higher as companies with shaky credit will have huge challenges in trying to finance a login and a password.
Note #2: Yes, you may finance soft costs such as training and implementation. Financing a SaaS contract basically amounts to financing air, so if your company can qualify to finance software just about anything else you can imagine can be added.
Saving Money by Using an Equipment Lease to Extend a SaaS Contract
Software companies love prepayments for the same reason SaaS customers would prefer monthly payments. Software developers (and consultants) often have huge costs for human capital (paying the folks who keep the lights on).
While most companies can use an infusion of money, this is particularly true for younger software companies trying to recoup enormous development costs.
For this reason, substantial discounts can sometimes be reaped by paying a SaaS contract in advance for several years. In many cases, 25% or higher discounts can be negotiated for multiyear prepays.
Looking at an example of implementing software with $150,000 a year contract, let's imagine a 25% discount provided with 3-year prepayment.
That works out to $112,500 in savings - provided the company could produce a check for $450,000.
Imagine implementing a 4% per year equipment lease in order to enable this transaction to take place.
The math is pretty easy:
3 Years at $150,000 per Year: $450,000
3 Years at $14,000 per month: $504,000
Financing Charges (3 Year): $54,000
Total Savings with Lease: $112,500 - $54,000 = $58,500
Implementing a lease doesn't always make for a no-brainer decision like this. The strength of the leasing choice really comes down to the discount you could reap with multiyear prepayment versus what your ultimate financing costs would be.
However, in many cases, using a lease to finance multiyear SaaS contracts can sometimes be an easy decision.
Need to Finance Your Cloud Computing Contracts? Call us at (866) 631-9996 or click in the picture below.