Creekridge Capital’s Doug Andring discusses the history of technology vendor finance and how things have changed with the advent of financing soft assets such as “as-a-service” offerings.
The early years of technology vendor finance were quite simple – it started with the basic financing of hard assets like computers, servers and printers. Finance companies quickly gained an understanding of the future value of these hard assets and developed financial offerings based on the residual positions.
Finance companies then began to face challenging scenarios as software became popular. Customers began to request financing of this soft asset with no hard assets included in the transaction. It was difficult for finance companies to evaluate the risk of financing software-only transactions and figure out how to make software-only transactions profitable. Many finance companies sat on the sidelines and waited for their competitors to figure out solutions before they jumped into the marketplace with a similar financial product.
Today’s technology vendor finance world has quickly become much more complicated. New terms such as “cloud computing”, “managed services”, “big data”, “internet of things” and “everything-as-a-service” have become part of our everyday vernacular seemingly overnight. Finance companies are continually challenged to adapt their financial offerings to even more unique transactions.
What remains constant is that customers are always looking for the best way to run their businesses efficiently, effectively and profitably through technology acquisition. Meanwhile, technology vendors continue efforts to increase their sales and retain margins. While both the vendor and customer work together in a quickly evolving landscape that is now migrating to consumption versus acquisition, finance companies are being asked to formulate solutions that work in this new “everything-as-a-service” environment.
Offering the basic finance solutions of the past no longer provides adequate value to the vendor or customer. For both of these parties to reach their goals, finance providers must present unique solutions and do it as seamlessly as possible to enhance the customer experience. The days of standard technology transactions are quickly fading and being replaced by complex solutions as more customers look to consume capabilities as opposed to owning or financing assets.
While we are witnessing a historical shift in technology acquisition, some of the basics still exist as there are certainly companies who continue to procure technology and utilize a standard lease product to do so. There are still billions of dollars spent a year this way, but these same companies are also carving out some of that spend on “as-a-service” and cloud based solutions.
Finance mechanisms that worked for these companies in the past may not fill all of their needs now. While enterprise companies continue to dip their toe in “pay as you go” offerings, others, such as small and mid-market businesses, are seeing the value in buying by the drip at a higher rate. The benefits are numerous as customers want the option to pay as they use, get easy access to the data they need to run a successful business, while dramatically saving on infrastructure costs. An example would be companies that are moving to cloud based subscription offerings versus on-premise deployments.
With this being the new normal, the challenge that finance companies face is remaining relevant to vendors and customers by being able to provide solutions of today, not yesterday. The bottom line is that vendors still need access to cash driven through finance arrangements as they provide these new menu of solutions to their customers. The cost of equipment still exists in order to support the “as-a-service” offerings. The demand is there, maybe more than ever. Creativity and the willingness to enter into this market is not for the faint of heart as credit risks increase and new products and processes must be implemented – much like the software financing several years ago.
Technology finance has a long history of remaining nimble in a constantly changing environment. Finance companies have created solutions over the past 30 years to support this change for the vendor and customer and must continue to do so. The key is to understand the current and future needs of both the vendor and customer while remaining creative with your capabilities and offerings. If you take a seat and wait to adapt to the technology finance industry, you may find yourself a few cycles behind before you know it.
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