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Commercial
Services
Commercial Capital Payment Terms
Traditionally 90% of the transactions underwritten for software and
services utilize a “Capital Payment Terms” format. This is an
installment loan structure that is not a lease.
With this Capital Budget deal structure, the customer:
·
Typically uses their capital budget (CAPEX) to make
required payments.
·
Typically records the entire liability for that fiscal
period when the software is either received or put into service.
·
Internally commits part of their future years’ capital
budget for payments.
·
Takes depreciation over the number of years over which an
asset will be depreciated
·
Deducts the interest expense
Commercial Operating Lease
(FAS-13
Compliant)
Most corporations have Operating budgets, money allocated for
non-capital needs. Operating budgets are typically eight to ten times
larger than the Capital budget. This makes it advantageous for the
vendor to develop a financial payment strategy that can address and
access operating budgets.
Tapping into the operating budget is a viable means of overcoming
capital budget constraints. An operating lease is the vehicle to
accomplish this objective by enabling the customer to treat the software
investment as an off-balance sheet acquisition.
The Difference
Two types of deal structures are available to commercial customers:
Capital Payment Terms and Operating Leases. Under a Capital Payment
Terms deal structure the customer typically uses their capital budget to
make required payments and records the entire liability for that fiscal
period when the solution is either received or put into service. The
customer internally commits part of their future capital budgets for
these payments and takes depreciation over the class life of the asset.
An Operating Lease deal structure can tap into the customer’s operating
budget as a viable means of overcoming capital budget constraints. An
Operating Lease is the vehicle to accomplish this objective by enabling
the customer to treat the software investment as an off-balance sheet
acquisition. This type of acquisition is governed by the Financial
Accounting Standards Board and is often referred to as lease financing
compliant (based on) with FASB-13.
Like any unique
business model—making EBA an integral part of the sales process with
increase your success.
It is not the price you propose but how you propose the price. Let EBA
assist you in taking away the burden of up front ‘Sticker Shock!”
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