We are using Service Item for Sale right now and we’re looking for the best way to track cloud software licenses. Is custom record the best way? Or is there an out of the box configuration that I’m not aware of?

why isn't a service item working for you?

@Simon Whittle it will create too may records as we have a 1 to 1 relationship for a license and customer.

So if you're looking to track customer specific license information outside of the item or customer record then, yes, a custom record linked to both the item and the customer sounds like it would be the way to go