Since we at UrbanVolt launched our innovative business model, companies with a lighting need have stopped purchasing LED light fittings. So those who were selling lights are furiously pivoting in an attempt to meet market demand and offer a service instead of a product.
However, many of these offers are financed or leased lighting masquerading as a service - but what is the difference and how can you spot it?
Finance is a powerful tool in the service industry, but the only role of finance in a service business is to provide 'back end' finance to the service provider - not to finance the end user.
When finance is used to finance the customer instead of the service provider it is not a service, it is a financed sale of goods. The only difference is that the seller gets paid upfront by the leasing/financing company instead of getting paid upfront by the customer.
A simple example is a car rental versus a car lease.
A car lease is customer-based finance. When you choose to lease a car from a new car dealer, it is still a sale for the car dealer. But instead of selling it directly to you, he has sold that car to the finance company and you are buying it from that finance company over time. If the car breaks down or has a long drawn-out technical problem, you are still responsible for making all the payments, despite the fact that you don't have the use of the car during that time. That is not a service - that is a sale disguised in a way to make it more affordable.
However, car rental is provider-based finance. When you rent a car from a vehicle rental company, you are paying for a service over a defined period of time. If the car breaks down, the service provider replace it immediately or you do not have to pay for the time you didn't have use of the vehicle. These rental companies use a lot of finance to fund their vehicle purchases, but it is irrelevant and immaterial to the end user. The car rental company must replace the car when there is a problem and if they don’t, the customer doesn't have to pay. That is the definition of a service.
If you are faced with an offer for LED lighting (or anything else) where it’s not clear whether it’s a true service, ask yourself these questions:
1: Am I being upsold?
It rarely makes sense to replace every light with LEDs, particularly those which are on for only a few hours a week. Those who are selling or financing a product will want to replace everything while those offering a service will give you sound advice on what suits your business needs.
2: Am I being asked to fill out an application for finance from a third party?
This is financed lighting, not a service, and all the financial risk will transfer to you.
3: What happens if there is a problem, can I pause payment?
You cannot pause payment if you sign up for finance or a lease. With a service agreement you can pause payment until the issue has been resolved.
4: Who is responsible for the removal and replacement of a failed LED on my site?
Under a financed agreement, they typically only provide the funding. With a service agreement, your service provider will remove and replace any failed LED product.
5: Is the offer off balance sheet?
Under the recent tax changes, financed or leased lighting must go on your balance sheet. True service agreements are off balance sheet.
It’s important to ask these questions so that you’re clear on what you’re signing up for.
In summary, finance is sometimes misconstrued to customers but the basic difference is that with financed lighting, the customer takes all the financial risk.
But with a service, the service provider takes all the financial risk?
So the final question to ask yourself is, how much risk are you willing to take on both personally, and for your business?