Pay-per-use for capital expenditure.

To grow their businesses, manufacturing companies need to invest constantly in new equipment. The typical method is to borrow from a bank, raise equity or issue debt via a bond.

A third way is pay-per-use, a model already visible elsewhere. In technology, Software as a Service follows a pay-per-use structure, though not one typically financed by customers. Some equipment manufacturers offer Equipment as a Service, where customers pay for usage rather than buying outright. In energy, Power Purchase Agreements for solar panels or wind turbines can be structured so customers pay for the energy produced.

Securitization makes the practice easier to apply to the equipment itself. A company can go directly to investors, or even to large customers, and have them participate in financing the equipment. The investor provides the financing and in exchange receives royalties on the product as it is produced. The arrangement sits between equity and debt: technically it is debt financing, but the investor participates in the success of a particular product.

• Costs aligned with revenues. Payments are tied to production or sales volumes, which helps manage cash flow.
• A wider investor pool. Including customers, who can see it as a novel way of getting a discount.
• Shared risk. Tying payments to sales shares risk between the business and its investors, to the benefit of both.
• Direct participation for investors. A share in revenues far more directly than an equity investment allows, with potential for higher returns if the product succeeds.

Financing costs depend on the royalty rate and on market conditions at the time of issue, and can be lower or higher than traditional debt service.