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 SECURTY 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 developer's 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 collateralized.
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 customer's 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.
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