The Financial Blueprint for HaaS

A deep dive into the financial side of the HaaS revolution – how to navigate the multifaceted matrix of HaaS payment models versus the traditional model of upfront capital commitments.
The Financial Blueprint for HaaS
Andrew Gross
December 28, 2023
The Financial Blueprint for HaaS
Andrew Gross
February 22, 2024

5

min read

The Financial Blueprint for HaaS

Hardware-as-a-service (HaaS) has long moved beyond the hype phase and become a tangible, quantifiable cross-industry trend. The ongoing shift from one-time hardware sales to recurring subscriptions is a pivot with truly vast implications. From technology to consumer goods, from aviation to infrastructure, and everything in-between - more and more hardware manufacturers and vendors are embracing this paradigm shift.

What’s driving this sea change? A triad of forces – economic, technological and behavioral. Economic challenges have prompted customers to search for new revenue streams without replacing their existing hardware, and spurred manufacturers to keep barriers to entry low with flexible pricing models. Technological leaps like the IoT revolution demand that manufacturers find new ways to monetize connectivity. And customers’ mindsets have also changed. They, like many of us, are shying away from owning physical products in favor of Netflix-like subscription models.

Yet even as the shift to HaaS reshapes business paradigms, financial challenges remain. In this post, we’ll take a deep dive into the financial side of the HaaS revolution – how you can navigate the multifaceted matrix of HaaS payment models versus the traditional model of an upfront capital commitment.

Mapping the HaaS Financing Landscape

A key hurdle facing manufacturers in shifting to HaaS is the upfront capital required for deploying as-a-service hardware products. This issue is compounded for rapidly-growing companies who are transitioning from pilot projects to full-scale deployments, most of which require substantial upfront financing.

What type of lender can provide the right funding with the right terms to help you cover the initial CapEx and delay cost recovery over months (or even years) without significantly impacting your working capital? To find the right fit, lenders evaluate factors like your company's cash flow, asset value, and strength of contracts. These lenders broadly fall into three categories:

1.   Technology-focused commercial banks offer loans primarily for purchasing equipment or capital expenditures (CapEx). This loan-based approach allows ownership of the CapEx with scalability as contracts expand. However, it comes with formula-based structures, financial covenants, and an increase in leverage on the balance sheet as scaling occurs. Some examples of this type of bank include Stifel, HSBC, and Bridge Bank.

2.   Equipment lessors offer a 'sale leaseback' model, where the manufacturer sells its product to a lessor who then leases it to an end-customer. This arrangement can keep the debt off the balance sheet and may be beneficial for well-understood assets. Yet, it may involve complex cost calculations and buyback provisions, potentially affecting the overall cost and internal rate of return. Some examples of this type of lessor include Camber Road, CSC Leasing, and Farnam.

3.   Venture debt funds, since they are not banks, offer flexible structures and can support companies at earlier stages. This does, however, usually come at a higher cost of capital. While they can be beneficial in the early stages, they might not serve as a long-term financing solution and are considered useful for specific phases in a company's growth journey rather than continuous, prolonged financing. Some examples of this type of venture debt fund include Trinity Capital, Triple Point Capital, and WTI.

Navigating the HaaS Financing Landscape

Once you’ve got an idea of the type of lender you want to work with, you still need to figure out exactly how your offering fits in, and which entity is the best funding candidate for your company.

If you don’t have a strong in-house finance team to guide you, it’s best to engage early-on with financing entities as you build out your HaaS offering. Collaborating with the right group in banks or other financial entities, or engaging a firm that specializes in financial navigation, can offer invaluable insights.

There’s a reason you need to loop these groups in early (even for pre-revenue startups): it’s crucial to align financing considerations with your offering, pricing, and financial models. Deep and preemptive conversations with financing entities help your company accurately assess the practicality and cost implications of securing specific amounts of debt. This prevents miscalculations that will turn into issues later on – mitigating the risk of assumptions about capital availability or unforeseen high costs, helping obtain better terms or term sheets, facilitating realistic modeling and understanding debt feasibility in tandem with revenue growth projections.

Leveraging Cash Flow in a HaaS Framework

Cash flow is another critical HaaS challenge. There are four aspects of cash flow that should be carefully examined when crafting your HaaS strategy: lending (discussed above), equity, supplier terms, and customer payments. Gaining an understanding of the interconnectedness and trade-offs of these four facets will help you make more informed decisions about cash flow management within your Haas model.

While equity financing can be a good option for early-stage companies focused on growth and flexibility when traditional financing is limited, there are numerous alternative sources of capital available. For example, engaging with suppliers strategically can significantly impact your working capital. Negotiating favorable terms, like delayed payments until goods are delivered or longer payment windows, may reduce your need for extensive debt financing.

Similarly, customer engagement affects cash flow. While selling on a monthly basis facilitates quick sales cycles, securing annual advance payments or prepayments reduces reliance on debt financing. Balancing these methods based on the length of the sales cycle and types of customers you're selling to can minimize the need for debt as your HaaS business scales.

The Bottom Line

Powered by a convergence of economic, technological, and behavioral changes, the journey toward HaaS heralds a new era in the business landscape. Yet because the HaaS transformation is so fundamental, a robust financial blueprint is imperative. The shift to HaaS isn't solely about securing capital – it requires a strategic fusion of foresight, adaptability, financial acumen and innovative business vision. Your financial HaaS blueprint, when crafted carefully, is the bedrock of a thriving subscription-based hardware business.

One part of the financial HaaS plan, of course, is finding a technology stack to make the vision a reality. Xyte’s all-in-one servitization platform gives manufacturers a single pane of glass from which to manage and monitor the operational hardware data often required by financial partners. For example, a lender may need to see the real-time status or performance data of devices or want to know the location of equipment. Xyte’s rich, out-of-the-box applications provide you with robust tools to manage, run, and scale a connected device business as well as the dashboards required by your lenders.

Tags

as-a-service
HaaS
hardware-as-a-service