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.
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:
- Software vendors are providing discounts for multi-year software sales.
- IT providers are more hesitant to carry a multi-year software sale on their balance sheet.
- 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.