Why More IT Providers Are Financing Software Sales
Pros and Cons: Financing Multi-Year Software Sales
- Pro: The finance company pays the IT provider upfront the day the agreement starts, which means you and your suppliers are made whole on day one.
- Pro: The finance company evaluates and underwrites the credit of the end user and assumes the risk of repayment.
- Con: Financing typically requires additional paperwork. Our software financing agreements are one to two pages. This could lead to additional review during the sales process.
Pros and Cons: Holding the Receivables on Multi-Year Software Sales
- Pro: The end user is not subject to being introduced to a third party.
- Con: The IT provider bears the risk of future payments.
- Con: The IT provider must have confidence in its credit evaluation and underwriting ability, and be prepared to protect itself in case those receivables aren’t repaid.
- Con: The IT provider will not be repaid in full for at least two years. This may limit investment opportunities because money is still out the door.
- Con: The IT provider may have to account for lower margins on each transaction. Considering the time value of money (money today is worth more than it will be tomorrow and loss of investment opportunity), your margins might not be what you think. Just because your margin might be $300,000 on paper, you may be losing margin due to time value of money. Also, additional time spent and costs for collecting and administration may cut into the perceived margin.
Why More IT Providers are Opting to Finance their Multi-Year Software Sales
The reason we’ve seen the shift toward software financing comes down to IT providers wanting to support their clients’ desire to pay annually for their software licenses, but not wanting to front the cost of the purchase in order to get the discounts provided from software vendors on multi-year contracts.
End users also like the option to pay annually because it is what they’re used to, simpler to budget, and it doesn’t require large cash outlay for the full multi-year license.
As always, Ingram Micro Flexible Payment Solutions is looking for ways to make it easier for your clients to say “yes” to your solution. Learn more here.
This guest blog is part of a Channel Futures sponsorship.
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