The Difference Between Financed Lighting and Light as a Service
We love this quote because it reminds us of the imitators in the market who claim to be offering Light as a Service (LaaS®).
Since we at UrbanVolt created LaaS®, 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.
There are now multiple companies which tout their Lighting as a Service, or Light as a Service, offerings.
The good news is that more options give businesses more choice. But it also means that they must do more due diligence on each of the companies and offers to determine which is best for their business.
Many of the Light as a Service offers on the market are financed or leased lighting masquerading as a service – but what is the difference and how can you spot true LaaS®?
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. Instead 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 true Light as 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 Light as a Service, and all the financial risk will transfer to you.
3: What happens if there is a problem, can I pause payment?
Imagine trying to pause payment on your mortgage because the heating broke – you know it’s not possible, you must keep paying and deal with the heating problem at the same time. You cannot pause payment if you sign up for finance or a lease but 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 Light as a Service agreement, your service provider will remove and replace any failed LED product. So that means you do not have to absorb the cost of either the replacement product, or the labour to install it.
5: What VAT rate is being charged?
Services attract a lower VAT rate than a traditional purchase. VAT rates vary by jurisdiction but if you are being charged the highest rate of VAT for something which is being called Light as a Service, you are likely making a traditional purchase.
6: Is the offer off balance sheet?
This the single most important question you should ask. Under the recent changes to international accounting standards, financed or leased lighting must go on your balance sheet. True service agreements are off balance sheet while financed or leased lighting is not. So if your Light as a Service (LaaS®) agreement is not off balance sheet, it is not a true service.
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?