Both equipment finance lenders and their customers purchasing equipment are always looking for ways to both maximize their profits and reduce risk to as low as possible. One way of doing this is through usage-based billing, which is a low commitment, highly cost-effective model for financing.
Usage-based billing is a pay-per-use model, where customers are billed based on how much of a product they use. This means that their costs reflect how busy their business is; if things go quiet, they won’t need to worry about paying for assets they aren’t using.
With this model, a lease is established, and the customer can be charged for the overuse of the asset. For example, a business has leased some equipment, with a regular payment set up based on usage of 150 hours a month. If the customer exceeds that number of hours, they are billed an overage amount based on how much the equipment was overused.
Access to assets otherwise too expensive is one of the main reasons for the growing popularity of usage-based billing. It is an especially great model for small businesses that do not have a lot of cash available upfront. However, it also benefits any business looking for a “package” of services, rather than just the asset itself, at a viable cost.
Benefits of using usage-based financing for lenders
While there are obvious advantages for customers using a usage-based billing model, there are also numerous benefits for lenders. These include:
- Opportunities to upsell: with a more regular customer base, lenders have more opportunities to build long-lasting relationships and therefore have a better chance of cross-selling.
- Higher sales and wider reach: usage-based billing removes the barrier of high upfront costs. More flexible billing also encourages people to buy equipment they may not have been able to buy outright or through a normal lease.
- More control over assets: lenders are able to provide more maintenance and manage any depreciation much more effectively, extending the life of the asset and, as a result, making more profit off it.
- Improved data access: with usage-based billing, lenders have much more insight into how products are used, giving them the data they need to improve or expand on services.
What about the sustainability benefits?
At a time where sustainability and ESG are central topics in equipment finance, considering the impact of the loans you offer is critical. Usage-based billing is a very sustainable way of managing assets.
The way in which the assets are used plays a huge role in sustainability. In order to get the best revenue, lenders need to ensure the longest life through maintenance. This results in much less waste and an incentive to offer the most efficient equipment possible. It also helps the circular economy, giving lenders the opportunity to regenerate the asset at the end of its life.
Why not just use a traditional lease?
Leasing is similar in the sense that the customer does not own the asset. It is usually a fixed cost, and for many businesses, may be too high of an expense.
For example, a business requires a copier, but the number of copies they need to make varies month-by-month. With a lease, the usage doesn’t matter, therefore, this business will pay the same every month regardless of how many copies they make. Most businesses in this case will decide against leasing a copier, as their usage is not consistent enough to justify the cost. With usage-based billing, the business will only pay for what they use. This makes it a much more attractive form of financing for the customer, and results in more customers for the lender.
In the long term the payments may exceed the original cost of the equipment, as rather than the payments stopping once the asset is paid for like a traditional loan, the customer continues to pay indefinitely. However, the stability, convenience and lower monthly costs are often worth the higher overall cost (which benefits the lender greatly).
One of the biggest challenges lenders have is finding a software solution that can support usage-based billing in a way that suits their needs. Solifi’s equipment finance solutions are incredibly flexible, allowing lenders to structure billing using tiered rates depending on usage levels. It is also possible to create multiple meters; using the above example, the copier, toner and paper can all be on different meters, using the same usage data to generate multiple charges.
Contact us today to learn more about our usage-based billing capabilities.
