Digital Signage: Purchasing outright vs leased vs rental?
A typical digital signage solution is generally expensive and from experience, one of the most critical factors as to whether a client purchases the equipment or not is the final cost (basically the number of zeros in the figure). Even calculating and presenting the ROI may not persuade the client to make that final purchasing decision.
A financial strategy which we believe will help in landing any project, is to also include rental and leased financial options with every quote you submit to your client.
In summary, some of the advantages of rental and leased plans over outright purchases are :
- preservation of cash flow. The cost of the equipment can be spread over the term of the agreement. This means a full upfront payment is not required enabling the client to spend money running the business.
- there are many tax advantages. For rental and lease options, both payments are 100% tax deductible. If the equipment was to be purchased outright, only the value of the equipment depreciation is tax deductible. GST can be claimed on monthly payments through BAS claims whereas for outright purchases, GST is only claimed at the time when the equipment purchased.
- For the rental option, there is a flexibility to upgrade, add or delete the equipment during the term of the agreement. For the leased option, the client may be required to payout the remaining payments and residual value before upgrading to new equipment. For outright purchases, any upgrades or add-ons will need to be required to be purchased by the customer.
- With the rental option, the client will not be stuck with outdated technology. The equipment can be returned to the Finance company. For the leased and outright purchase options, , the equipment needs to be disposed of by the customer which may prove to be costly.
Visit the digital signage forum to further discuss some of these advantages in detail.
At Advertise Me, they are able to provide their clients with outright, leased and rental options for all of their digital signage solutions.
About the Author
With the new round of LED signage going up, many businesses are again looking to upgrade their existing display(s). While the new LED lighting may be more expensive upfront, the savings are immediate and systems usually pay for themselves in under 3-years. Utilizing an equipment lease to obtain such energy saving equipment almost always makes excellent sense.
I have reviewed many Business Plans for Digital Signage most are written by individuals savvy on the technical side but lacking in the understanding of capital markets.
Financing Companies:
Are looking for cash flow and an exit strategy if the model is unsuccessful.
Investors
Are seeking a much higher return and will want a percentage of the company.
The successful launches occur when there is a realistic understanding of the risks and rewards. What each party brings to the table. Coordination of the strengths and weaknesses of the client the digital signage company and the respective vendors.
Leasing is an option if the lessee is an acceptable credit risk. It is generally not an option for new companies or new concepts. When a leasing company sees collateral spread over a few hundred to a few thousand locations the credit of the end user has to be very strong as the collaterall cannot be recovered in an economically viable manner, Lendors and Leasing companies view this as an unsecured loan or lease.
Raising Capital: I have seen a lot written about ROI to the client. Not to the Investor. If you cannot explain how you are going to build the company and repay the investor in a 2 minute or less elevator speech you are spinning your wheels. The markets are tough and your competition is not other digital signage companies it is everyone trying to raise cash. There is a limited pool of investors and an abundance of companies seeking capital.
If you raise equity you have to show an above average economic return to the investor for his risk. The business plan has to show an exit strategy. The return to the investor should be between 30-40% per anum. That means for every $1,000,000 invested the return should be about $2.6 million after 3 years and $4.5 Million after 5 years. The exit strategy is usually based on the sale of the company. In addition to the cost you will be giving a percentage of your company away, You are now reporting to a Board of Directors who are going to ask tough questions on a regular basis.
Ths is the only industry where companies of 2-10 people attempt to raise equity and debt to deploy millions of dollars on their own and put their equipment in a Fortune 1,000 company. Would a mortgage lender give you money to build a house on someone else’s property? Not without an ironclad lease that exceeds the term of the debt.
Many companies miss the opportunity as they are not open to reviewing strategic relationships along the way.
Or
Are afraid to discuss creative financing options with there clients in a true partnership fashion.
Pease contact me with any questions. I have been an investor, lender, owner and advisor for Digital Signage.
Bob Burtis
bburtis@viranet.com
Bob, many thanks for the insight. We have been in the digital signage industry for quite a number of years now and we agree with everything you’ve said. For small new businesses, I believe it’s hard to raise capital especially when you don’t have the client base or the portfolio. We were at one stage thinking of heading down the path of looking for investors but didn’t like the idea of giving away a percentage of the company.
In Australia, there aren’t too many digital signage network operators because the investment capital to setup the network is too high. I have noticed that large advertising companies who already have exposure and the cashflow are actually sustaining this operation (I’m guessing that they are potentially offsetting this cost from their existing print media).
What do you suggest for new small businesses who are looking to raise capital or even look for financing companies.
This is a very interesting topic. We have found that most businesses prefer that the equipment be provided as a service. This reduces that high upfront cost, while still allowing all signage that is requested.
Thanks for your discussion.
John