Technology research and advisory firm Gartner estimates that, over the course of the next five years, SMEs will spend $112bn cumulatively on software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS). What’s driving this level of expenditure? Over the past five years or so the global economic climate has dictated that all businesses must scrutinise their in-house IT departments and budgets to identify cost savings and efficiency gains. On-premises technology has historically been the solution, requiring skilled technicians to maintain, but providing little flexibility if the business needed to change quickly its storage levels, or number of licence users, or migrate to the latest platform.
Cloud services can enable the same functionality but potentially add a lot more flexibility as costs increase and decrease in relation to the end-user requirements. Cloud service usage has increased dramatically over the past three years or so as the economy has returned to pre-recession levels. Coupled with the maturing of the ‘cloud’ marketplace, in terms of reliability and the ability to host and offer ever more complex solutions, and customers being encouraged by vendors to transition to cloud, it’s no wonder the finance and leasing market see this as the future of technology funding.
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Financing cloud solutions is a challenge for many lessors as payment contracts can be variable. There’s nothing for the lessor to own and, with stringent regulation for banks, ensuring that the right financial mechanism is provided to customers is paramount. Since launching United Trust Bank’s technology finance division just a few months ago, we’ve already introduced innovative new agreements in response to market demands. Whether borrowers are virtualising their server environment, transitioning to a total cloud service or a hybrid model, or even acquiring a new and bespoke software system, we are able to provide a financial solution for all new technology equipment, including 100% services offering. Judging by the level of enquiries we’re seeing, our approach has been very well received by brokers operating in the technology sector.
Today, those in the funding community are embedding themselves with either specialist intermediaries or the service provider themselves and really getting to understand the contracts that the vendors want to sell and how the customers want to pay for it. The emphasis is on the payments due from the client to the vendor for the specific period of time, how the customer can vary the payment and what the vendor is expected to deliver to the customer. Technology has progressed but the vendors’ desire to have as much of the contract advanced on day one hasn’t changed. Now that the technology is a true service, the customer demands payments to be made as and when the service is delivered. Standard minimum term lease agreements no longer provide a solution for this sector. The lessor owns nothing, but if the lessors infers within the contract that it does provide ownership, it can potentially be liable for the performance of the service being delivered. In the event that the lease moves into a secondary period, then the contract between the client and the vendor will need to match.
This isn’t an alien concept to the market. Many lessors have financed software on a lease without getting into the licence chain and so bear the same risks around ownership and consideration. But we are evolving. Instead of offering what are hardware financing solution we are providing the broker market with specific payment agreements that will allow vendors to secure as much up front payment as they can and give the customer the ability to pay as the services are delivered. Customers, in collaboration with the vendor, can also vary their repayments at certain points when they are increasing or decreasing the level of services from the vendor.
Making predictions in the IT space is challenging even for specialist lessors providing off-premise finance solutions to the broker market. One thing, however, is for sure, and that’s that it will only get bigger and intangibles will form a greater proportion of the value financed within our market.
Kevin Flowerday is head of technology finance at United Trust Bank
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