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Technology financing options whether it be IT ( information technology ) assets or the newest kid on the block, ' cleantech ' and 'ICT', requires a combination of access to capital and solid expertise. Whether your company is an established corporation or a start-up working through that ' sweat equity ' stage you require funding for your investments in technology.
Let's examine some key options and strategies in tech finance that will provide your firm with the growth potential you need. ICT financing is both an opportunity as well as a potential risk. You want to be able to manage those risks with the assistance of a business financing expert. Oh, and by the way, this pertains to whether you are a user or a vendor of these assets. While many look to the government for finance options that might be available at the end of the day your firm will no doubt require external financing solutions.
That might be for licensing products and services or acquiring hardware and other related assets. Companies invest capital into technology to ensure their firms are winning in today's competitive environment as well as the obvious efficiencies that come from cost reductions; that's why financing that investment properly is so important and why funding from Canadian leasing sources is so critical.
Healthcare financing has never been more in the news, pandemic issues included! Issues of cost and planning are top of mind for acquisitions. Understanding how technology provides value to health care systems is key, as is those financing arrangements around acquisitions.
CLEANTECH INNOVATION
The area of 'cleantech' is a rapidly growing area in the technology space. Companies looking to solve environmental issues often have large financing needs. Investments in computer hardware that revolve around energy or building commercial facilities are very capital intensive. Canada is ranked high in the Global Cleantech industry. For initial financing many of these firms look to private investors, angel investors, friends and family, etc.
Technology Finance Options
There are a number of ways to finance tech assets; the challenge is ensuring you have chosen the appropriate technology funding solution for all the types of tech you are considering purchasing - in some cases certain solutions may be highly inappropriate. Business owners and their financial managers are looking for simple processes to address financing needs. They are considering issues such as upgrades, as well as the obvious costs around rates and financing costs.
In some cases it might even make sense to consider a sale leaseback financing to recover capital in your tech investments. While retaining the use of those assets cash flow is increased via the replenishment of working capital. It seems to always come back to the capital budget process when you consider those higher cost technology investments. Those budgets need some relief for the often high ' sticker shock ' of tech investment costs. Larger projects that come with longer implementations, maintenance, upgrades needs etc. require financing that meets those budget needs.
METHODS OF FINANCING TECHNOLOGY
Capital and operating leases play the main role in acquiring ' ICT ' needs. Key issues to look for in these transactions are your ability to fund progress payments to vendors and any prefunding issues that might arise with suppliers. We've noted the concept of ' tech refresh ' is a main driver in financing technologies, your ability to upgrade hardware and software as required. In some cases a ' rental program ' might make sense - there is a saying in tech that your business wants to ' use technology ', you don't want to ' own technology '.
Managed services financing is huge in the tech sector. Typically these solutions involve ' the cloud ' and are focused on larger dollar investments. Firms such as THE GARTNER GROUP advise that cloud solutions and distributed computing are among the hottest issues in tech today. Simple flexibility around payments and invoicing should be a prerequisite in your financing discussions. These latter two issues are the mainstays of equipment leasing in Canada, as is the need to ensure you have 100% financing - no down payments required!
The GARTNER GROUP says it best, including our favourite old business adage "Cash is king". Target those items that will have a real cash impact on the profit and loss statement rather than noncash items like depreciation or amortization. For example, cost savings in cloud services have a real cash impact, as opposed to reducing on-premises software licenses or owned assets like hardware. Selling and leasing back assets can provide real cash savings as well." Source- Gartner Group
Working with the right financing expert allows your firm to properly match the duration of the financing, i.e. ' the term ', while at the same time ensuring you have upgrade capability if needed. That issue of ' life span ' in technology is always critical. Some companies might require laptop financing for their entire workforce - here is where information technology finance excels .
Click here for more info on business leasing and technology finance in Canada .
Business owners / financial mgrs. should know that financing is available for both hardware and software. Yes, Virginia, software can be financed!
KEY POINT - Financing software needs allow your company to conserve capital so a business credit line or a term loan are not required - its all about credit preservation. Upgrade capability is also very important in your preliminary discussions around your financing needs. You need to know your financing, typically via a lease, is flexible and has the ability to handle upgrades. Here the concept of a ' master lease ' is very beneficial, as schedules of new assets added on can be easily implemented.
You also need to ensure that the whole issue of technological obsolescence can be addressed via matching the duration of your financing to the technical life of assets and software being financed. Key issues that come into play are the valuation of assets, useful economic life (ouch! isn’t that an accounting term?!) and types of financing available in the Canadian marketplace.
Clearly, tech financing covers a variety of industries, we're focusing today primarily on computing and information communication technology industries, but our comments are broadly applicable to a number of other asset types. One of the key challenges in financing technology is simply the fact that the majority of goods and services provided and utilized by your firms either depreciate rapidly or, unfortunately slowly become obsolete.
There is a great analogy that tech assets are like a mine's assets, they are depleted and are 'replenished by development'. A true analogy! Financing tech assets must take into consideration the obsolescence factor - a good example, of course, is PCs, laptops and servers which easily can depreciate 30% per annum.
Creative financial arrangements around these types of assets are critical and we'll discuss that a bit also. In certain cases your firm might be involved in developing technology versus being a user for your corporate operating needs. Financing solutions are available for the unique position your firm is in either as a user or developer. As a user of technology owners, financial managers and their chief information officers are looking for financial creativity around acquiring assets that will be productive in the business and increase efficiencies.
And no surprise to any business person that hardware, software and other ' IT ' (information technology) needs often require a significant capital investment. Software and services, often financeable, are other solid examples of high technology assets that require specific options and strategies. These products are high gross margin to the seller and when financed properly provide both benefits to the user and profits to the vendor/lessor.
Factors that drive software financing are upgrade cycles, the continued proliferation of PCs and mobile products into all facets of business, as well as the obvious productivity gains these products provide. Tech and Solar assets can be either financed or purchased. When these assets are financed key issues for financial and credit scrutiny include interest coverage and cash flow, valuation of the technology re the type of financing desired.
In the U.S. Surprising almost half the country's employed work in IT and other emerging tech areas such as solar, wind, etc. We're quite sure Canada's numbers would be too far off that. For computer IT assets typical lease and other financing terms rarely go over three years... it’s simply a question of the useful life of these types of assets.
Solar projects require alternative strategies since they typically have a longer payback. Financing transactions in IT and Solar industries tend to be cash flow, and not asset based when it comes to lending and financing transactions. These types of transactions clearly aren’t 'asset based lending' in its traditional form.
Upgrades are common in computers, they aren’t in Solar. It is important for both borrowers and vendors and lessor to separate financing from licensing and technology issues - the intellectual property in the asset being financed rarely if ever transfers to the borrower. Key options and strategies in technology financing typically include operating leases, providing the user with significant flexibility. Equipment Leasing in Canada can easily handle these transactions.
FINANCING YOUR REFUNDABLE TAX CREDIT VIA AN SR&ED LOAN
Thousands of firms, potentially many of them your competitors, utilize Canada's SR&ED Tax Credit program as an inventive to invest in new technologies. Typical refunds for your r&d capital investment are in the 35-40% range of your total spending. The refunds pertain to portions of your spending in salaries, consulting, materials, etc. That cash refund can be turned into immediate cash by utilizing a SR&ED financing loan to get the money earlier as opposed to waiting for the federal government refund from Canada Revenue Agency.
Your firm should strive to have a long term strategy in place that focuses on your needs and financing options in information communications technology : costs, budgets, and sources of financing when it comes to tech funding .
When either financing tech, or information communications technologies or software, consider working with an experienced, credible and trusted Canadian business financing advisor with a track record of industry success who should be selected on the basis of experience, knowledge, and references and access to financing sources you need today.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
