By Neil Holmes, Vice President of Business Development, Liberty Commercial Finance

There is little question that highly secure and dependable data storage has become increasingly mission critical to businesses across all sectors.

That said, the components of these facilities are reaching technical obsolescence at faster rates than ever before, and there is a shift underway toward off-premise cloud data services rather than traditional server-based data storage. According to Cisco, more than 90 percent of data center traffic is projected to be cloud traffic by 2020.

The result? More and more businesses are finding that maintaining their own on-premise facilities does not make as much sense as moving their operations to largescale data centers run by managed service providers (MSPs).

This is good news for MSPs, as more users seek partners that can offer access to the latest data center assets and flexibility in infrastructure. In fact, the global managed services market is expected to grow to $268.25 billion by 2022 – up from $140.53 billion in 2016, according to Mordor Intelligence.

With this increase, a question emerges: how can MSPs adapt to growth and stay competitive while maintaining strong cashflow?

New Opportunities and Challenges

While some have argued that the rise in cloud computing will lead to the end of the data center, the reality is much different. The fact is, new cloud computing offerings are driving tremendous demand for off-site infrastructure needed to support the cloud.

Users who depend on service providers for their Data Center Solutions for their storage, backup computing, virtualization and security needs are drawn to several benefits, which include:

  • Flexibility in infrastructure as needs change and technology advances
  • The ability to quickly gain access to data storage, instead of building or upgrading an on-premise facility, which can take months or years
  • Predictable payments for their business
  • Shifting technology costs from Capex to Opex to stay within budget and improve financial ratios

While these factors drive user business, they also present MSPs with the challenge of how to acquire and maintain the very best hardware and storage services for their clients.

The solution to this quandary often lies in lesser-known financing strategies available to MSPs.

Financing Structures For MSPs

Managed service providers’ infrastructure needs shift constantly.  Technology changes, new clients and new projects fuel the need for new and/or upgraded hardware and software.

What many MSPs don’t realize is that there are options available to secure short-term financing that can cover 100% of the cost of their data center assets, giving them the opportunity to:

  • Acquire the hardware and technology their clients need for the exact amount of time they need it.
  • Increase cashflow by saving upfront costs
  • Scale for growth by paying for new assets, setup, and maintenance within one steady monthly payment

For example, we recently provided $250,000 in financing to an MSP to support a project for a new client on a three-year contract. The MSP was able to lease the assets required for the exact length of the contract on a capital lease.

This essentially means that at the end of the three-year lease, the MSP will own the equipment. The lease structure allows for increased cashflow during the term, as the provider pays approximately $7,400 per month for the assets, while receiving upwards of $12,000 per month from the newly contracted client.  Further, if the new client renews its contract, the MSP will reap the rewards of having assets that are paid in full.

That said, a capital lease is not the only option for MSPs. Some providers will need to upgrade equipment more frequently than others.  This is especially true for MSPs that serve clients with highly sensitive data, such as those in the financial sector.  For these MSPs, an operating lease is often a better solution.

This structure works similarly to the capital lease described above, but involves lower monthly payments and the option to buy at Fair Market Value at the end of the term, or to hand the equipment back and refresh with the latest technology.

Oftentimes, this is the right choice because both traditional data center hardware and cloud-supporting infrastructure reaches technical obsolescence very quickly – sometimes in just three years or less.

MSPs can also seek out finance companies that offer Life Cycle Asset Management (LCAM) with their finance structures. This means that one monthly payment can cover both the equipment and any ‘soft costs,’ such as installation, training, maintenance, software, etc. – which is a huge benefit for providers who do not have their own engineering team.

LCAM also means that as part of the deal, the funder will handle the disposal of the equipment or take back the equipment and remarket it, causing no extra hassle for the MSP.

The Bottom Line

The data centers of the future are here now, with cloud computing technologies continuously promising more capacity, more power and safer data.

This means more companies are moving toward storing their critical data in largescale, off-site facilities. As technologies advance and access to these premier data centers and services becomes commonplace, expectations will continue rise, and providers must position themselves to be able to take on the equipment and resources needed to support these demands.

At the same time, as it becomes easier for end users to utilize top data center services, MSPs must remain nimble enough to be able to adapt to shifts in needs that fluctuate depending on contracts and client requirements.

By setting up finance structures that fit their needs, MSPs can continue to service their clients with the very best in data storage while preserving their cashflow and protecting themselves for future growth.

Neil Holmes is Vice President of Business Development for Liberty Commercial Finance, a boutique finance company with deep roots in the industry that provides customized financing solutions to companies throughout the U.S. Contact him at nholmes@libertycommercial.com.