Recent trends in the marketplace indicate that vendor financing programs — specifically captive and quasi-captive solutions — are changing. There are now many options that make it much easier for today’s vendor to deploy a comprehensive customer finance offering that yields virtually all of the benefits of a traditional captive with none of the challenges or risks. Advancements in technology coupled with greater acceptance of business process outsourcing seem to be disrupting the build versus buy calculus. These combined forces have reduced the need for the huge investment of resources that was once required to deploy a customer finance solution.
The fact that a growing number of manufacturers, distributors and dealers — collectively referred to as vendors — include a customer financing option as part of their go-to-market strategy makes perfect sense because customers are demanding it. This is particularly true in technology and adjacent markets, where according to the Equipment Leasing and Finance Association’s 2014 Survey of Equipment Finance Activity report, new business volume in technology is up over 20%, with a significant amount of all technology related assets financed externally in some way shape or form. Leases, loans, lines of credit, or even credit cards either provided by the vendor or sought out directly by the customer are utilized more now than ever.
This explains why customer financing using a captive or quasi-captive program has long been a key strategy for vendors in many different industries. Account and customer control are at the forefront of their acquisition and retention strategy. Despite the benefits, there are barriers to entry that prevent many organizations from launching a true captive finance arm. Such barriers start with a formidably steep price tag coupled with the difficulty of balancing competing corporate objectives such as driving sales while managing risk.
In addition, beyond the obvious requirement for capital, in-house financing requires a tremendous investment in people, systems and an overall platform that requires deep experience to launch and manage. For many organizations, these requirements pale in comparison to the massive commitments of time and organizational energy that are required to deploy and administer a captive program.
After carefully considering the options, many vendors decide that an in-house solution may not be worth the investment of resources. In that case, the fallback option has historically been to select a single source financing program partner in order to deploy a “quasi-captive” solution. In this case, the barriers to entry are often replaced by a shift in control from the vendor to the finance company, which can result in the vendor itself becoming a captive to the program partner who owns the portfolio.
Hurdles that vendors face when considering a traditional captive program, coupled with the possible loss of control in a quasi-captive solution represent a critical gap in how the equipment finance industry meets the needs of the marketplace. Progressive equipment finance companies are exploiting the opportunities that spring from this gap by combining technological advancements with expertise in operational best practices to offer unique solutions for the vendor space. Vendors can leverage the capital and expertise of these companies to gain full access to the benefits of captive financing, with virtually no resource drain or loss of control that typically accompanies the initiative.
Depending on the approach, there are typically two forms the vendor finance program can take—the options are what we refer to as either the virtual captive or the Captive–as-a-Service (CaaS) model. In a virtual captive, the manufacturer employs internal human resources to facilitate originations, but relies on a finance company such as LEAF for operational support, capital to fund transactions and for portfolio servicing.
In the Captive-as-a-Service (CaaS) model, everything is outsourced. With the right financing partner(s) in place, vendors can today outsource their captive arm while enjoying the traditional benefits that a captive provides with virtually no drain on resources. The big question is whether the finance industry will recognize the opportunity and then step up to take advantage of it.
This as it turns out, is an important question for the industry to consider. The new models are not only highly beneficial to vendors but to equipment finance companies as well. These “virtual” solutions represent the proverbial win-win situations that define the most successful customer relationships. With these solutions and programs in place, the vendor gets a turnkey, exceptionally cost-effective means of offering a robust customer financing program. The finance company, on the other hand, strengthens both its portfolio and bottom line, adding good assets and credits while benefiting from a predictable and sustainable source of volume.
There are many other benefits as well. Partnering with a vendor in virtual or CaaS solution breeds close familiarity with the company’s products and its sales channels. The finance company develops deep expertise in the vendor’s products and services, as well as expanding the comfort level with the people who are maintaining them. As these relationships strengthen and grow, the finance company’s underwriting capabilities broaden and deepen as well. These factors all ultimately come together to mitigate risk, arguably the most valuable benefit of all.
Additionally, substantial opportunities through expanded product and sales process knowledge can lead to very productive joint marketing programs. Partnering with vendors that enjoy established, well-recognized brands serve to enhance by association the finance company’s brand as well.
For the equipment finance industry, taking advantage of these opportunities requires a heavy dose of forward thinking coupled with a willingness to embrace automation, flexibility and transparency. Today, with the right processes, people, technology and — most importantly — mindset in place, finance companies can fill an important and growing need for customer financing by today’s educated vendors. What is needed is for these finance companies to employ unconventional, non-linear thinking and the organizational will to take action.
Based on our experience, there are some prerequisites for a finance company to participate profitably in the vendor program space. The ability to support and expand long-term relationships with key customers is an important facet of any financing program. One-and-done transactional financing has no place in the vendor space. Instead, a singular focus on relationship building is critical. Finally, a significant commitment to and investment in technology including partner, customer and system-to-system interfaces that enable the delivery of seamless services is at the heart of a state-of-the-art program offering. Together, these elements form the stable platform necessary to deploy a comprehensive solution.
When seeking opportunities, a key driver is to identify vendors who understand the value of a strong customer finance offering and who utilize outside experts to offload non-core business processes in order to concentrate on revenue production. Anecdotal experience in the marketplace indicates that the willingness to outsource is on the rise.
Second, many vendors are weary to put all of their financing eggs into one basket. It is now clear that a hybrid approach of multiple lenders, each focusing on a particular market segment or product line may, in fact, be a much more effective model for some manufacturers.
In the case of LEAF, our go-to-market solution is the “Captive in the Cloud,” which includes five critical elements. We combine our capital with a comprehensive solutions-based approach to financing, sales and marketing expertise, advanced technology and a proven servicing platform. This gives us the ability to quickly deploy a customized captive solution to just about any organization that requires a seamless customer financing function.
These evolutions in vendor-sponsored customer financing should be viewed as a disruptive trend. Virtual captives and particularly Captive-as-a-Service both provide tremendous flexibility not only for customers, but also in how they are served.
The important thing to understand is how the market is changing. The new paradigm is about flexible integration and fluid partnerships, as opposed to rigid structures and sole ownership. A competitive finance company should be able to spot potential partnering opportunities and then be positioned to either take advantage of them or to ramp up in order to do so.