Partners and customers can now finance a broad range of software, hardware, and services through Microsoft Financing. Founded as Microsoft Capital, the unit previously limited its financing activity to Microsoft Business Solutions (MBS) products, such as Great Plains, but it announced at the company's July 2005 Worldwide Partner Conference that it is expanding its financing to include all Microsoft software, as well as hardware and services are associated with a Microsoft software deal. To spur interest, Microsoft Financing will pay a bonus to partners at the conference who use its services by the end of Sept. 2005.

Managing Risk

Vendor financing is not unusual in the IT world, but it has generally been confined to hardware. Commercial lenders have been reluctant to finance software purchases, since repossessed software cannot easily be resold and the vendor will not usually refund the purchase price.

In 2002, Microsoft stepped in as a lender for MBS customers, offering "total solution financing" that covers not only the Microsoft software but also related hardware and services.

Brian Madison, general manager of Microsoft Financing, says that software financing has worked out well for Microsoft. Losses have been no greater than for other commercial loans, and it has proven to be a significant boost for sales.

Financing Benefits

Based on its MBS experience and other factors, such as its large cash holdings (US$37.7 billion at the end of Mar. 2005), Microsoft has decided to broaden the solutions for which it will provide financing. By making financing available, Microsoft achieves several objectives, says Madison:

Larger sales. Microsoft found that purchases that are financed are typically 30% to 40% larger than other deals, meaning more revenue for both Microsoft and partners.

More choice for customers. Financing gives customers another option when purchasing software. Customers with fixed annual budgets for software can purchase larger, better integrated systems.

Faster closing. Microsoft's loan approval process is faster than that of many commercial lenders, reducing the length of the sales cycle and eliminating a time-consuming task for customers seeking a commercial loan.

More revenue for partners. Partner services, such as custom software development or deployment services, can be financed. Since services are the largest component of many IT projects, partners are likely to benefit.

Flexibility. Madison says Microsoft will structure repayment schedules to meet customers' needs. Payments can be deferred, seasonal operations can skip payments in periods during which they have little revenue, and Microsoft can structure schedules where payments begin low and increase, often in parallel with the customer's business growth.

Spread payments for all licenses. Customers can already get what amounts to an interest-free loan, repaid over a three-year contract, by adding Software Assurance (SA), an upgrade rights and product support offering, to their volume license purchases. But SA adds at least 25% a year to the cost of those licenses. The new financing option means that customers who want to spread payments over a longer period no longer need to purchase SA to do so.

The Fine Print

The rules for Microsoft financing appear to place few obstacles in the way of customers. No down payment is required, and customers can finance their purchases over 12 to 60 months at competitive interest rates. Rates will vary by country and financial market conditions, but Madison says today's deals in the US$100,000 range might be financed at about 6% APR, and deals at the minimum US$10,000 level might cost about 8% a year.

Rates will also be affected by whether the purchaser is financing just software, or hardware and services as well. Because of Microsoft's interest in selling software, software-only loan rates might be slightly more attractive than rates on loans that mix Microsoft software with hardware and services.

Customers are not limited to purchasing Microsoft software. While Microsoft may not loan money for a deal that includes none of the company's software, it will consider loans that include hardware, services, and software from other vendors.

Financing will be limited initially to nine countries—Belgium, Brazil, Canada, Germany, Mexico, the Netherlands, Spain, the United Kingdom, and the United States—but Madison said it may be available in about 20 countries by 2008.

To give partners an additional incentive to offer financing to customers, Microsoft will for a short time pay another 1% of the total loan amount to partners themselves as a finder's fee. To be eligible for this promotion, the partner must have attended the Worldwide Partner Conference and the financing must be approved by Sept. 30, 2005. The promotion is available in all countries in which Microsoft Financing operates except Brazil and Mexico.

Microsoft Financing's Web site is www.microsoft.com/financing.

Financing programs for partners are described at https://partner.microsoft.com/financing (available to partners only).