GPU Loans & Leases

The process at a glance

Because GPUs are so expensive, financing a GPU cluster ends up being a complicated dance. The neoclouds who get funded need to get customers, investors, and lenders to all sync up, which often means going back-and-forth between the three.

Here is the process we suggest emerging neocloud operators follow, from start to finish.

The sections below walk through each step in detail. We also include typical sample terms, a list of lenders/lessors with appetite for GPUs, and resources like spreadsheets and calculators.

1. Get a strong offtake commitment

Offtake is a customer ready to pay, a.k.a. contracted revenue. It is the single most important thing you can bring to a financing partner.

As a new neocloud, it is very hard to finance off of inference or on-demand revenue. You must have offtake.

No ifs or buts, this is a non-negotiable (despite many people asking me for workarounds and insisting I find them a solution).

Imagine the lender’s point of view: a company approaches them. The company has no money, limited history and historical revenue, and is asking for millions of dollars. It’s saying it’ll make tons of money by just “renting the servers out, look at my projected revenue.” Would you believe such a company?

Rental rates are unpredictable. Contracted revenue is not. That is why a signed commitment makes it much easier to get financing.

Even if on-demand can be more lucrative, unpredictable cash flow means you might miss monthly loan/lease payments. Contracted cash flow is better.

What does good offtake look like?

Not all offtake is created equal. The best deals tend to share a few things:

• The customer has more than enough money to pay: a very large, well-funded startup, or an enterprise. Great if they have an S&P credit rating. For example, if they’re committing to pay you $100M, they better have $300M+ in assets and be cash-flow positive.
• A multi-year commitment, ideally 3 years or more of take-or-pay, and at least 2 years. One year usually isn’t enough to pay for the equipment financing, unless you charge a very high rental rate.
• The customer is not another neocloud.They’re not profitable enough to make a lender happy, and these neoclouds are courting dozens of smaller neoclouds.
• The customer is willing to provide a 20-25% down payment. If they’re not, they’re not serious and they are probably talking to multiple providers with low expectations of you.

Note: AMD has an offtake backstop program. They still expect you to try to get offtake customers, and many offtakers don’t like AMD.

Still, AMD’s backstop will help lenders in the case that you become an AMD neocloud. You can get financing using AMD’s A credit-rating.

What is a commitment?

Start with something non-binding if necessary. You don’t need a fully executed contract to get moving: a non-binding, signed LOI is preferred.

But worst case, call them up and ask for a strongly worded email saying they want XYZ GPUs and are willing to pay ABC, etc. Screenshot that email as the commitment.

2. Start the equity raise

Now that you have the offtake commitment in hand, you must raise equity. By equity, I just mean cash from investors without a repayment schedule. These investors could be High Net Worth Individuals, some Venture Capital firms, and most likely, Family Offices.

Many neoclouds market themselves as “Sovereign AI” neoclouds, for their parts of the world. This helps them get local enterprise customers, but also helps them position for investments from local family offices, and government-backed funds.

You need to raise 30-50% of the equipment cost as equity. You should have a rough sense of equipment cost based on the offtake.

For example, here’s the rough math for B200s. Customer wants 64 GPUs, 64 / 8 GPUs per server = 8 servers. 8 × $600k per B200 server, incl. networking = $4.8M.

Also, an offtake commitment is the best way to convince equity investors of the potential returns on the project. Here’s how a leading neocloud enabler, Hydra Host, pitches the IRR (return rate) of projects for reference.

Don’t forget, equity investors also need to know you’re very credible. If you don’t have a good pitch on why they should invest in YOU, that’ll also make them hesitate to invest.

• Good project + bad operator = no equity raise.
• Good project + good operator = great equity raise.
• Bad project + good operator = still an okay raise.

Without it, lenders and lessors will struggle to underwrite you. Lenders do NOT want to take all of the risk themselves. They want to see you have some skin in the game, and that there is another source of capital supporting your overhead costs.

Lenders do not want to pay for salaries and rent; you need equity investors for that.

The 30-50% depends on your track record, history, and several other factors. For reference:

• New operators need to bring 50% in equity for their first projects.
• Emerging operators need to bring closer to 30-40% in equity.

Beyond the 30-50% of equipment, you will need a little bit more. You’ll also need to have cash for at least 6 months of operating expenses handy at all times for the next 2-3 years to breed confidence.

Use the offtake commitment to get the equity raise started, as you get the next steps kicked off in parallel.

3. Get a colocation lease quote

You need a data center facility to put the equipment. It needs to be a reputable Tier III facility with the right power and cooling. Tier IV is not necessary. Reach out to colos and colo brokers if necessary. Your first few projects should be small enough that finding spare colo space isn’t an issue; only bigger projects are harder to find space for.

You can also explore modular data centers (the prefabricated shipping containers), and other jurisdictions (i.e. Canada instead of the U.S.) if the offtaker is okay with them.

4. Get a hardware purchase order quote

Talk to an OEM (Original Equipment Manufacturer) like Dell, Supermicro, Lenovo, etc. Many smaller operators use Supermicro.

If you’re looking for the best price, other options might be better. You could go through a Value-Added Reseller (VAR), which resells equipment from OEMs, often at a better price if you’re a small operator. OEMs don’t give much time of day or preferential pricing to small operators, but VARs do.

Do your homework. Some VARs are less credible than others, and will bait-and-switch. They might give you one price, and then switch the price last-minute before delivery.

Find VARs by looking at the Preferred Partners list of OEMs. Here’s Supermicro’s Authorized Partner list: supermicro.com/en/wheretobuy.

Used or refurbished equipment is also another angle to consider, if the offtaker is okay with it. There are also some OEMs that are more “Chinese” affiliated, which offtakers may dislike. But they can be cheaper. Also do your homework on this.

A purchase order (PO) quote will be based on your Bill of Materials. Your engineering team should work with the offtaker to decide the cluster’s architecture, and figure out each piece of equipment you need. Remember, it’s not just servers, you need networking gear, and a lot of related equipment.

Most PO quotes are valid for 30 days. Memory has been very volatile as of late, so keep in mind that your equipment seller’s pricing could go up.

5. Get a financing term sheet

Now you have an offtake commitment, equity, and a rough sense of costs from the colo and for the equipment.

You’re ready to approach financing parties. There are four main categories:

1. Private Credit Lenders
   • Big boys like Apollo and Blue Owl are probably out of your league.
   • Find smaller boutique firms that mention “technology” as being a key area for them on their website.
2. Digital Infrastructure Lenders
   • Hard to qualify, these are the big banks and funds that do bridges, highways, mining, cell towers, etc.
   • Examples include Macquarie and DigitalBridge.
3. Crypto Lenders
   • Find Discord channels, and look for “Crypto Whales”. Many are disappointed with the current low yields from crypto, and looking to earn money from AI infrastructure instead.
   • Groups like USD.AI are leading here.
4. Equipment Finance Lessors
   • Whether they’re bank affiliated or independent, these are firms that do asset-based lending and equipment leases.
   • Some are IT focused, like Data Sales or NFS Capital.

At a certain size, you can also look at structured finance (Asset Backed Securities). Truthfully, if you don’t know these terms, you’re likely not able to pull this off. It’s something that only Wall Street insiders ever use.

Categories 1 and 2 are hard to unlock if you’re still an emerging operator.

How to raise

Remember, you’re a hot commodity, and you want the potential financing groups to feel like you have interest from multiple parties. You need to run a “process”: a short burst where you reach out to the lenders and lessors in order of low to high priority, and get an auction going.

A shotgun approach over several months is the worst way to get financing.

Make sure to have your stuff well laid out, and speak to several parties in a short one-week sprint. Have an already-signed, 1-2 page NDA ready to send after every first meeting with a new lender, something their counsel will let them easily sign. Don’t create more friction in the process.

Loans vs. leases

Leases come in two flavors:

1. A finance lease, sometimes called a capital lease or $1-buyout lease. This is economically just a loan: you make payments and own the equipment at the end.
2. An operating lease, also called an FMV (fair market value) lease. Here the lessor keeps ownership at the end of the term. In return, your down payment at the beginning of the lease is lower, and your monthly lease payments are lower. At term-end, you can return the equipment, extend the lease at a lower monthly rate, or buy it at its fair market value.

Operating leases are pretty much the exclusive territory of equipment finance lessors (category 4). The residual (or FMV) is the lessor’s estimate of what the equipment will be worth at the end of the term.

The higher they assume that residual, the lower your monthly payments, because they expect to recover value from the hardware later. The risk is that the equipment is worth less than expected at term-end.

Deciding between loans and leases

The first question is how much equity you have right now. If you have enough, go for a loan; it’s the cheapest way to own the equipment. But if you’re not established, and can’t get 50% equity, you might have no choice but to go for the operating lease, which has lower cash flow requirements.

The other question is whether you even want the equipment in X years’ time. If it’s a 5-year offtake agreement, you might not want 5-year-old equipment at the end of the term and would rather plan to return it, which points toward an operating lease.

Note: A common criterion from equipment finance is at least 2 years in business and audited financials. Be warned.

If you need to model it, here’s a spreadsheet that compares the two.

Common questions about loans

1. Is there a prepayment penalty?

   Sometimes; it depends on what you negotiate. Preferably none. Ask for open prepayment so you can pay the loan down early without a fee.

2. Is the interest rate fixed or floating?

   For smaller deals like this it is usually fixed. Sometimes it is floating at SOFR plus a spread. Expect around 15%.

3. Do you own the equipment at the end?

   Yes, free and clear once the loan is repaid. There is no end-of-term buyout, so the cost to own is simply the upfront equity plus the scheduled payments.

Common questions about leases

1. Is a down payment required at close?

   Usually yes. Lessors typically ask for about 20% down at close, which is less than the equity you’d need for a loan. The down payment reduces the amount financed, and therefore the monthly payment; it does not change the end-of-term FMV buyout.

2. What determines the FMV buyout price at term-end?

   FMV is based on the wholesale market. The lessor usually has its own asset-management team and typically sets the figure; sometimes a mutually-selected third party appraises it. You can negotiate a buy-out cap, but it will be high. For example, the FMV buyout might be capped at 50% of the original equipment cost.

3. What if we want to extend rather than buy?

   It is negotiated. Extending 12 months is typically standard, subject to then-current financials, at a monthly extension price of roughly 30-40% of the original lease payment. Alternatively, refinance (take a loan equal to the FMV to buy the equipment and repay it over ~12 months) or simply return the equipment.

How to approach financing parties

Have every detail ready. The more detailed, the more real and credible you seem. Have a full data room and diligence questionnaire ready.

Have all your financials ready, going as far back as you can. Get them audited even. Get financials from the offtaker too if it helps.

Here’s a data room template:

Getting the term sheets

Get a term sheet, even if non-binding. Here are the main terms you can expect.

Your loan term will usually equal your offtake length, maybe slightly longer if you can’t make the payments under a shorter term. But the shorter the term, the better for the lender. Expect 2-3 year terms if you’re a new operator.

Lease term sheets read a little differently: instead of an interest rate you’ll see a lease rate factor and a monthly payment per dollar funded, end-of-term options (a $1 buyout or FMV), and a net-lease structure where you cover maintenance, taxes, and coverage on the equipment.

Note: Another source of financing can be mezzanine financing. These are more aggressive lenders who will replace some of the “equity” portion of the financing stack. For example, instead of 30% equity and 70% debt, you might do 15% equity, 15% mezzanine, and 70% senior debt.

Mezzanine financing is usually anchored on the senior debt terms. They’ll ask for a few interest points higher, and possibly warrants (ownership shares in your business) and other more aggressive terms. They’re useful when you don’t have enough equity, but expensive.

Before signing the financing offer, make sure you have your ducks in order. Many people overlook shipping insurance (super expensive), normal insurance, shipping costs, and other small fees. Your financing partner will expect you to have these, and will likely force you to pay for them if you didn’t include them in your final financing ask.

6. Convert the offtake into an MSA

With a financing term sheet in hand, go back to the offtaker and demand they sign a binding Master Service Agreement (MSA).

Tell them:

“I have the financing, facility, and equipment quotes ready. The only blocker is a signed offtake contract and your down payment.”

Make it clear they’re holding up the transaction.

7. Close financing

With the customer down payment and signed MSA, you can now get the contract signed with the lender or lessor. You’ll need to have the 30-50% equity for the loan, or the down payment for the lease, ready.

Once signed, it’s time to execute.

8. Place the hardware purchase order

The hardware order usually requires a 20-30% down payment. Some OEMs like Dell are known to ask for 100% payment to place an order.

You usually have to wait 8 weeks to 3 months to get the equipment. Therefore, some aggressive operators might do the down payment much earlier in the process, if they have the equity on hand.

To do it, you have to be very confident in getting a lender later on, or being able to pay for the rest of the equipment. It’s high risk, high return. It may be unavoidable if the offtaker requires a quick timeline to award you the contract.

Note: If you’re doing a lease, the equipment finance company usually likes to pay the down payment to make sure they have the title or ownership over the equipment. Don’t pay for it yourself without checking in with them.

Once the order is ready to ship, the equipment seller will usually ask you for the rest of the payment. At that point, the lender or leasing company should pick up the bill.

9. Execute to the offtake timeline

Sign the colo lease. Equipment is on the way. Now install it, complete burn-in, and get the customer paying happily.

Most offtake contracts have delivery SLAs, so you often need to move fast.

Note: Some lenders will only release their loan once the equipment is installed and the customer is ready to pay. They’re worried that the customer might disappear after equipment is installed, or that an issue happens during installation itself.

In that case you may need some form of bridge financing, a type of lender which pays for the equipment order over a 90-120 day term. Once the customer is ready to pay, the senior (main) lender will pay the bridge lender directly. The bridge lender will be anchored to the senior lender’s terms, most likely a few % higher interest rate than the senior lender.