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There’s More Than One Way to Structure Equipment Subscriptions

Date: Feb 14, 2024 @ 07:00 AM
Filed Under: Industry Insights

The equipment finance industry is adapting to a trend that has transformed the rest of the economy: subscriptions. Procurement managers started using software as a service two decades ago to avoid the upfront cash outlay of a purchase and bundle products and services into one arrangement. Now the equipment finance industry is embracing the concept as an alternative to a basic loan or lease.
Energy companies, data centers, construction companies, commercial real estate owners, transportation fleets, and others are subscribing to HVAC equipment, heavy machines, and computers.
But as with any new trend, there’s plenty of confusion in the space among both lessors and lessees. Who owns an asset being procured via subscriptions? What products are appropriate for a subscription? What happens at the end of a subscription term?
There’s more than one way to structure equipment subscriptions, and how a vendor and customer should structure a deal depends on a few factors: budgetary and procurement considerations, convenience, supply availability, and the life expectancy of the asset.
Let’s cover what potential subscribers should be considering in each of those categories.
Procurement and budgetary constraints
One of the main value propositions for equipment finance subscriptions is that they provide procurement flexibility to customers who do not have the capital budget to buy expensive assets but may have the operational leeway for a subscription.
For example, consider a facility manager at a factory, power plant, or data center who is accountable for performance. They may need to meet a high standard of uptime. But the current equipment is aging, inefficient, expensive to maintain, and not dependable. Unfortunately, the manager does not have the capital expenditure budget required to buy new equipment that is necessary to meet the performance standards. For that manager, subscriptions can be a life saver.  The equipment finance company can retain ownership of the asset for the facility manager. The subscription allows them to obtain the new equipment along with long-term O&M service and pay for all of it through their operational budget.
Plus, subscribing to an asset doesn’t mean the customer can’t own it. There are situations where it makes sense for ownership to transfer to the customer after the subscription term. For example, let’s say a procurement manager oversees the acquisition of equipment that requires a difficult and expensive installation and removal requires an expensive and time-intensive uninstallation. If the equipment has additional life and is performing well, the procurement manager might not want to give it back at the end of the subscription term. Or maybe the asset is a critical part of the end user’s operations, and they don’t like the leverage that the lessor has for negotiating renewal terms. In those cases, the procurement manager may choose to negotiate an upfront title transfer or automatic transfer at the end of term.
One of the most persuasive arguments in favor of subscriptions is convenience. With subscriptions, the equipment owner can bundle together all related expenses to simplify contracts, maintenance, and finance for the subscriber. For example, procurement, licensing, and maintenance can all be rolled into one monthly payment and contract, saving time for people across departments on the customer side.
That said, it’s not hard to imagine a situation in which a customer might hesitate on this point, too. Maybe the company subscribing to equipment has long-standing relationships with a number of different vendors. In that case, they may not want to bundle everything together, and either the subscription can be adapted to their needs, or a more traditional lease or transaction may be more appropriate.
For vendors, equipment finance software is critical to the ability to manage different deal types across customers. An asset finance platform should have the flexibility to allow a captive or financial institution to facilitate ownership transfer at any time during a customer relationship — or never. It should also give the vendor flexibility and scalability across a portfolio of customers with different types of leasing transactions.
The scarcity of equipment is another important factor in structuring a subscription.

You may choose to rent equipment in perpetuity if it can be easily replaced. For example, if you rent a fleet of trucks and can easily switch to another product with another vendor at the end of the term, you may not want to own the asset. The current vendor will need to offer competitive terms to retain the business.

By contrast, if the equipment is scarce or expensive to replace, it might make sense to take ownership with no obligation when the term expires.
Asset life expectancy
The final factor to weigh when considering subscriptions is the life expectancy of the equipment. Some assets perform for many years after an initial subscription term and are therefore favorable to own. Other technologies are rapidly evolving. Customers will want the next best thing to improve performance and avoid technological obsolescence. In those cases, customers will seek subscriptions that allow them to upgrade as the technology evolves.
Due to this variability, the same vendor and customer may choose to structure their transactions differently for separate pieces of equipment. For example, heavy machinery may last for 15-20 years, encouraging ownership. But the same company may also require technology-intensive hardware and software that is rapidly evolving. The customer would likely choose to own the machinery under a long-term arrangement while subscribing to the technology in a way that allows for faster upgrades.
The upshot is that there is no blanket formula for subscriptions in equipment finance. Even a single company may choose different structures for the various assets it requires. What’s important is that you know what factors to consider — and that your lender has the flexibility required to accommodate your different needs.

Ben Speed
Global Head of Private Credit | Johnson Controls Capital
Ben Speed is the Global Head of Private Credit at JC Capital, the captive finance and private credit lender of Johnson Controls International.
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