Debt Financing for Deep Tech: Hardware as a Service Model

By Matt Trotter, Managing Director, Venture Banking

As your hardware company transitions to a HaaS model, you’ll need to understand the financing options that can cover your working capital gap.  

In recent years, more deep tech hardware companies have transitioned toward a Hardware as a Service (HaaS) model, also known as an operational expenditures (OpEx) model. In this business model, companies offer their hardware to customers as a managed service rather than a one-time purchase.

HaaS can be advantageous on both sides. It lets customers avoid a sizable upfront payment and access later updates while the company gains a recurring revenue stream, built-in customer retention, and ongoing data insights. 
However, despite these advantages, choosing HaaS means drastically changing your company’s cash flow and operational dynamics. As a financial decision-maker, you should prepare to navigate new funding complexities, including your debt financing options.

What Funding Challenges Does the Hardware as a Service Model Pose? 

Traditional hardware sales involve direct transactions where companies receive immediate payment for the hardware. Transitioning to a HaaS model means companies collect payments through subscription fees over time (though often in addition to substantial one-time payments). 

“Transitioning to a HaaS model means companies collect cash on a subscription basis as part of a longer-term customer relationship,” says Zachary Kimball, founder & CEO of Hardfin, a software provider that automates hardware financial operations. “This often means hardware companies have upside-down cash flow for a year or more on each deal.”

This shift can significantly strain finances, as initial quarters—or even years—may see more cash going out than coming in. Due to the delayed nature of their cash flows, these companies often face long-term working capital gaps. Your company’s investments in maintenance and updates that support the subscription-based model may lead to further financial strain during this time.

When Is the Right Time to Explore Hardware as a Service Debt Financing? 

It’s sooner than you think. It’s critical to explore your financing options early in the commercialization phase. Engaging with potential lenders early helps firms understand the available financial products and the criteria to secure a loan. 

The structure of customer contracts, including cancellation policies and payment terms, affects whether the contract can be financed successfully later in the process. For instance, the consumption model, where the customer pays for what they use, may seem convenient initially but is typically more challenging to finance later on. 

You could leverage equipment debt or venture capital for your early pilot customers. However, as soon as you get a sense of product-market fit and customer adoption, you should consider exploring HaaS debt lending terms. By starting early, you can leverage the insights you gain from these early customer interactions and optimize contract terms in a way that will be attractive to debt providers. 

“I often talk to founders or finance leaders at early-stage deep tech companies looking for debt for the first time,” says Kimball. “They did a bunch of customer deals but haven’t given any thought to how their contract structure impacts financing and accounting. Sometimes they end up in a tough position as a result and can’t access debt at all.”

Best Practices and Strategic Advice for Hardware as a Service Borrowing

Lender Considerations: It’s in your best interest to understand how debt providers think. When evaluating debt for your company, a lender may consider: 

• Venture Risk: Analysis of the investors, the management team’s strength, intellectual property, and the company’s valuation.
• Contract Value: The nature of your customers, contract lengths, and terms, including service history and cancellation policies.
• Residual Asset Value: The resale potential of the hardware, its customization level, and asset distribution.

Cost and Scalability: It’s crucial to fully understand the cost of debt and incorporate it into your gross margin calculations. Assess how your financing facility can scale with your business and anticipate potential changes in structure or pricing.

Asset and Data Ownership: Consider the implications of asset and data ownership. With leasing companies, for instance, you may not retain ownership of the hardware, which could impact your control over the equipment, customer relationships, and access to valuable data.

Typical Hardware as a Service Lenders and Terms

Venture Banks: These institutions may have experience with deep tech HaaS companies and can provide debt financing solutions and other banking solutions tailored to your specific needs. The borrower retains ownership of the asset at all times.

Leasing Companies: These entities can provide equipment loans but may retain ownership rights to assets, posing potential risks and limitations for the hardware provider. 

Equipment Debt Funds: These offer financing solutions tailored to companies deploying capital-intensive hardware under service contracts. They are backed by limited partners who can be more flexible with lending terms but expect higher returns. 

The Forward-Thinking Potential of Hardware as a Service Debt Financing

Financing a shift to a HaaS model presents unique challenges and opportunities. With foresight, deep tech companies can successfully navigate this transition and ensure their innovative service models are sustainable and scalable. 

“Companies should understand the financial landscape early so they can structure contracts wisely,” says Kimball. “This means choosing a financing partner early on—and picking the right one.”

At Stifel Bank Venture Banking, we specialize in understanding and supporting the complexities of HaaS financing. We’re here to help your company thrive in this evolving market. 

Talk to Stifel Bank Venture Banking deep tech financing expert Matt Trotter at mtrotter@stifelbank.com.