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A Practical Guide to Software Leasing

BY William S. Veatch
September 01, 2003

Although the demand for software financing and leasing continues to grow at a tremendous rate, software financing and leasing remains one of the most challenging and least understood areas of leasing. The focus of this article is on the financing and leasing of 100% software, although there is some discussion of mixed leases of equipment and software. The goal is to provide lessors with a practical guide to the issues arising in a typical software financing or leasing transaction. The emphasis is on direct leases between a lessor and a lessee, as opposed to a vendor finance arrangement where the software licensor is also a party.

Structure Loan v. True Lease

One of the threshold issues that a lessor must decide is whether (a) to finance the software with a debt instrument, which could be a lease that creates a security interest, a promissory note, or an installment payment agreement, or (b) to attempt to finance the software with a true lease. By far the most common choice is to use a debt instrument, although true leases are common in certain markets.

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