 Software Finance
Investing in Information Technology is not a cost to your business but rather an investment for the future. If you look consider how IT has evolved, the benefits of Software Finance are easy to see; ten years ago we were reliant on the fax and the telephone. Now most business users have access to both e-mail and the Internet. Businesses that embraced these technologies early where able to move ahead of their competition easily
IT and software in particular, is an investment unlike any other. With the pace at which technology moves - one Internet year has been likened to five earth years – it can be very hard to keep up.
It is accepted that paying for cars, buildings, plant and machinery over a period of time makes sense. However, staff and IT produce similar benefits but are paid for in two totally different ways. This need not be the case.
Cash flow is the life-blood of any business. Why spend cash on software that is going to take time to implement and embed before you even start to get a return on your investment?
Software finance through lease rental is the obvious alternative. With this option you can pay for the packages you need on an ongoing basis in instalments rather than a lump sum.
There are several benefits for taking this approach:
* Fixed payment - makes predictable and easy budgeting;
* Tax efficient - reduce tax liability;
* Unsecured - no charge is required over your assets or premises;
* Cost justification - by paying for the system as you use it, the return on your investment will be far quicker than if you paid cash on day one;
* Additional credit line - existing funding arrangements can be used
for other purposes.
In spite of this, many companies still choose to pay cash for their IT. Why is this? One of the main reasons is the reluctance of traditional banks and leasing companies to finance IT. This is due to the fact that they do not consider IT to be a tangible asset, and they prefer the security of car, plant and machinery finance.
More than ever, companies are finding it necessary to finance software and associated services without any need for hardware - thus presenting even more of a problem to their bank manager - after all, what security is there in a CD ROM?
The answer is often found in the form of specialist finance companies who can offer a range of options to suit a company's needs.
Options Available:
Loan – This type of finance is normally taken over three or five year terms and paid quarterly by Direct Debit. Rentals are generally fixed for the duration of the agreement and are tax allowable.
Lease – Businesses are able to lease the software and licences they need immediately without having to pay all costs upfront. Leasing payments are regular and have the option for upgrade as technology becomes obsolete. Leasing is a financial contract between the business and a leasing company. You will be committed to repay a given number of fixed rentals for the term of the contract, (for example 36 monthly payments of £50+vat). The supplier provides the software to you and is paid by the leasing company. The goods are owned by the leasing company at all times until the end of the lease when you will often have the option to buy the software outright. Because you are essentially renting and not buying the goods you can claim 100% tax allowance on the payment.
Credit – This allows a business a certain number of days or months before payment becomes due. Useful for companies who do not wish to use up all their cash-flow at once.
Choosing the Right Type of Finance
All types of financing offer different advantages and it is essential that you assess your own circumstances and requirements before committing to a specific finance contract. For example, if you
• want to own the software and licences straight away, an outright purchase (cash or loan/overdraft) might be appropriate;
• may want to own the asset at some point in time and want to take advantage of instalment payments, hire purchase might be the best option;
• do not want to own the asset at all but require it for a period of time, consider a financial lease or software finance.
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