Software leasing is dead – long live leasing

vaultI’ve just heard from a second consultant in under a month that software leasing as a finance mechanism appears to be dead.

The first consultant approached 10 different leasing companies. The story was the same at each company. They required personal guarantees, strong operating histories and enough cash or equity to make the lease a no risk proposition.

Today another consultant sent me a message to say that they’d contacted five separate leasing companies. In each case the leasing companies wanted personal guarantees from the owner.

Previously as many as 95% of all leasing applications appeared to gather an almost automatic approval (albeit some at very high interest rates). In today’s economy that percent appears closer to 50% and the companies getting leasing almost always would have qualified for traditional bank financing.

Isn’t the concept of leasing supposed to be that:

  1. it’s easier and
  2. less stringent

than a much more formal bank loan?

Traditionally companies pursued leasing to avoid the hassle of personally guaranteeing bank notes or pledging collateral. All this financing was considered “off balance sheet” and while leasing often carried a 5 to 10% premium over a traditional loan it offered financing to those who otherwise might not qualify for a traditional loan.

Now that leasing companies are increasingly demanding similar guarantees as banks – what’s the incentive to lease?

2 Replies to “Software leasing is dead – long live leasing”

  1. I’ve been in the equipment and software finance business for more than twenty years and I think you’ve missed the boat on your comments that software leasing is dead. Why would a company still look to a third party finance company to finance their software purchase versus their bank?

    1. Unless you are going to cross collateralize the loan with other assets most banks are not going to consider financing software. Leasing companies will do this with no other collateral being required.
    2. Most banks will require 20-30% down payment and finance the balance for most loans – leasing companies will do this with nothing down or they may require a security deposit equal to two payments.
    3. Software is completely unsecured so if you choose to finance this with your local bank you will likely see your operating line being reduced or other assets added (see #1)
    4. Today, cash is king and businesses need to retain their bank lines so using third party financing companies to help maintain your cash position is even more important.
    5. As far as requiring a personal guaranty this is nothing new and is still based off the individual credit of the company. There are still many leases that are being approved without a personal guaranty BUT lets also be realistic – how many banks do you know are giving a small business $50,000 without a personal guaranty?
    6. Yes, we’ve all seen the credit market tighten up but if you would like to compare what it takes to get a $50,000 lease approved versus a bank loan in today’s market you will still see leasing is still much easier.

    Is software leasing dead? Absolutely NOT! We are seeing more requests every day for software financing and we expect it to continue to grow in the months ahead. If you would like to discuss this further I welcome your call at 320-968-2007.

    Don Polfliet
    Falcon Leasing

  2. I believe Don’s comments to be very accurate. We have seen a big uptick in financing software with Sage’s year end.

    While leasing companies are taking a more conservative look at transactions, it is still far less than a traditional bank loan. First off, Personal Guarantee’s are far less stringent than that of a bank loan. After listening to a number of Sage’s clients who are excited about purchasing the software, we realize their fear of a personal guarantee is very misguided.

    I always like to ask the question “If you are not going to stand behind your company for the life of the lease, why should a bank?”

    However Corporate only transaction are still being done, although it is increasingly harder. Third Party lending is still very vital to Small to medium size businesses. Owners do not want to “tie up” their Lines of Credit or be out of covenant with existing loans with their bank.

    I will say its been very slow this year, but we have been through this before, for quotes or to look at your transactions that have been declined please do hesitate to give me a call at 949 608 2249


    Mark Grimes
    National Account Manager
    Dimension Funding, LLC

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