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Why More IT Providers Are Financing Software Sales

Financing software has been a simple solution to support end users’ desire to pay annually, without burdening the IT provider with the full multi-year contract.

4 Min Read
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Nearly half of the technology financed with Ingram Micro Flexible Payment Solutions in 2020 was software. As many companies adopted a more distributed workforce, software to securely support remote access was critical. However, before 2020, software often wasn’t financed.

We see three drivers of the shift towards financing software:

  1. Software vendors are providing discounts for multi-year software sales.

  2. IT providers are more hesitant to carry a multi-year software sale on their balance sheet.

  3. End users want to pay annually for their software licenses.

Financing has been a simple solution to support end users’ desire to pay annually, without burdening the IT provider with the full multi-year contract.

Example: Financing vs. Holding Receivables

Here’s a real-life example we saw at Ingram Micro Flexible Payment Solutions recently.

The Client and Transaction

A large construction company based in Alaska needs a new security software solution to protect itself and the data of its commercial clients. They get a quote from an IT provider who is selling them the software. The quote is for a three-year license or subscription agreement for a total purchase price of $3MM, and they give the green light to move forward.

The Financial Implications of Holding Receivables

The IT provider is now on the hook to figure out how the financial aspects of the transaction. Traditionally, the customer will create a purchase order for three yearly payments of $1MM. The first payment is due in 30 days, the second payment due in 12 months, and the third payment due in 24 months.

However, the IT provider still has to pay the vendor or the distributor for the cost of the software–to the tune of $2.7MM, owed in full in 30 days. If you were holding the receivables yourself, you pay the $2.7MM upfront and receive $3MM over the next two years.

How the IT Reseller and End User Won with Software Financing

In this example, Ingram Micro Flexible Payment Solutions pays the reseller the $3MM upfront. They’re able to pay their vendor or distributor for the cost of the software, again for $2.7MM, and come out ahead by the margin of $300K. Then, Ingram Micro Flexible Payment Solutions bills and collects the payments in the purchase order arrangement above: first payment due in 30 days, second payment due in 12 months and third payment due in 24 months.

Pros and Cons: Financing vs. Holding Receivables on Multi-Year Software Sales

More and more providers we speak to say that holding the receivables on their balance sheet is cumbersome, and especially during tough economic times, isn’t ideal. Financing has its trade-offs for the reseller, and on the next page we explore the pros and cons.

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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