Management

Creative Ways for Startups to Finance Hardware and Software

Technology investment is a must for modern businesses, but startup budgets are paper thin. Here are two options.

Andrew Kavalauskas is a startup specialist at CDW. He is an experienced sales professional in the information technology and solutions sector, dedicated to customer service.

Startup businesses are hot: In 2022 alone, more than 5 million new businesses were created, a 44 percent increase from 2019.

But with 20 percent of new companies failing within their first year, according to the Bureau of Labor Statistics, owners need to achieve net positive cash flow before investment capital runs out. They also need to consider cash flow consistency; quick profits aren’t enough to sustain startups. According to recent survey data analyzed by invoicing software company Skynova, two factors were most likely to cause startup failure: lack of investment, responsible for 47 percent of failures in 2022, and negative cash flow, which doomed 44 percent.

That means that for most startups, keeping costs as low as possible can be the difference between success and failure.

Yet simply refusing to spend is untenable. No modern business can function without laptops and other hardware, or without access to data management resources, business applications, collaboration technology and more. Technology simply isn’t optional.

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With owners focused on getting the business off the ground, however, investment in technology is often limited to the here and now. For example, many open-source software solutions are tempting because they allow organizations to get started on work right away. However, they often lack the security, support and scalability available through licensed tools. As a result, businesses may find that spending less up front actually costs more in the long term.

The same is often true with hardware. A startup might purchase low-cost storage servers as a stopgap measure while business revenue grows. Within months, however, it may find these servers full and lack the capital for replacements or an upgrade.

What else can a cash-strapped startup do when full-price purchases aren’t possible? Two of the most popular alternatives are financing and leasing.

How Startup Businesses Can Lease or Finance Tech Investments

CDW partners such as Gynger offer software financing services, allowing startups to pay 20 percent to 30 percent of the product price up front and the remaining balance over time. One small business used Gynger to finance its purchase of CrowdStrike security software, which resulted in more available capital and improved business growth.

In a lease arrangement, startups can access technology with minimal costs up front and smaller payments over time. When the lease term is over, companies can return the technology, renew the agreement or buy out the lease.

There are pros and cons to each arrangement. Leasing offers low upfront and total costs and flexible payment options, and the solutions receive regular updates during the lease term. At no point does the company own the solutions it is leasing, though, which means it will spend more money over time. And should the company wish to exit the lease before its term expires, it can expect to pay a penalty.

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A financing arrangement is a way to purchase a solution so that the company eventually owns it. The company may also have greater control over product options and add-ons. But the cost barrier is higher, the payment terms are less flexible, and any upgrades the company seeks are likely to require a new purchase.

What’s the right solution for your startup business? It depends on your circumstances and the solution you want to acquire. A smart approach is to start with a conversation with a trusted adviser.

This article is part of BizTech's AgilITy blog series.