Software Financing on the Rise

Companies finance durable goods. In technology and the channel, that often means heavy iron – large storage arrays, mainframes, clusters of servers and bulk-ordered notebooks. But you’d finance nondurable goods, such as software?

Big software vendors, such as IBM and Microsoft, are expanding their financing programs to include software and associated services to help solution providers close deals and put products in the hands of customers.

"IT financing has changed from a traditional way of thinking to a new way of thinking for CIOs and CEOs today," says John Callies, general manager of IBM Global Financing. "When the financing business for tech started in the late 1980s or early 1990s it was a way of financing hardware acquisitions…Now most of investments being made are to make a company more competitive in marketplace. Or companies want to even up the flow of cash out and benefits in. That's a logical way to approach the business."

IBM Global Financing recently reported a dramatic rise in its software financing of 90 percent year over year in the first quarter. That's not just from business through VARs. That's through all software sales, direct and indirect.

The company attributes the big jump in software financing to tightening credit markets and a shift from hardware sales to "solution" sales that include hardware, software and services.

>>CLICK HERE to read more about IBM's Software Financing Options<<

That trend is going to continue, says IDC's Pucciarelli.

"We expect the amount of software that is financed will double from 2007 to the end of 2011," he says. According to Pucciarelli, at the end of 2007, software financing made up 21 percent of the total financed IT equipment, software and services. That number will grow to 29 percent by the end of 2011, IDC predicts.

"That's a 34 percent increase in terms of share and the dollar value is basically doubling," he says.

Part of that is because the nature of IT is changing. Equipment sales are not increasing as fast as software sales are. And by using virtualization technologies, companies are taking a single box that would run a single application and putting many more applications on that box.

"Now we talk about 25 images on a physical server," Pucciarelli says. "In the old days software was bundled in with the equipment lease. Now we are seeing more desegregation between software and hardware purchases. People are not thinking about it as one-to-one relationship."

Software financing can't always use the same financing vehicles as hardware, though. Because software is considered intellectual property that is licensed, finance companies can't get the value of an asset at the end of the lease. So some non-technology finance companies – including a VAR's bank -- may balk at doing such deals. But there are plenty of technology specialists such as Cisco Capital  or GE Technology Finance available for credit deals.