An increasing number of distributors and manufacturers see in vendor finance the opportunity for bigger volumes and higher margins. But what are the intricacies of setting up a programme? And what are the best practices? Lorenzo Migliorato investigates.
The good fortunes experienced by European asset finance over the last few years came on the back of shifting customer expectations around convenience and rapidity.
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Influenced by their experience as leisure consumers, buyers now expect to be offered the possibility of financing commercial equipment directly at the point of sale, especially in the case of SME owners who might not have the time to shop around banks for an asset finance facility.
Such expectations provide an opportunity for vendor finance collaborations, but they also require lessors to continuously monitor the attractiveness of their proposition against competitors old and new.
Kieran O’Brien, network member for Ireland at Invigors, believes competition pressure is creating a need for differentiation among vendors, and also through the implementation of financing.
“The reality is, revenues from traditional routes to market are rapidly declining,” he explains.
“What many of these manufacturers want to do now is to augment their profits and create additional margins, and one route to that is to offer financing to customers. [Vendors] are in a position to make additional upfront fees and end-of-life fees as well.”
There is a rationale of cash-flow management for a vendor to seek a finance partner. “The broader principle of vendor finance is that it helps manufacturers sell more products, because they can close deals where customers would like to buy, but do not have the budget to,” says John Rees, managing director of Société Générale Equipment Finance (SGEF).
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By GlobalDataHe adds that financial collaboration is not just about meeting customers’ expectations, it also enhances the vendor’s position within the transaction.
“Typically, cash buyers will go to the manufacturer and say ‘I like your product, I want to buy it, but I want a 20% discount’,” he says.
“We always tell the manufacturers to never answer the discount question, but to try and ask what the customer is trying to achieve. You take the conversation away from price and into other value-added services.”
Vendor finance capabilities also offer a tool for better customer retention. “It creates a customer relationship that lasts over time,” says Rees. The adage that a cash sale is a lost customer may be a little aggressive, he says, but it speaks to the fundamental fact that “when someone buys for cash, they could buy any other brand when they next need it”.
A vendor with a finance proposition, meanwhile, can offer trade-ins and pre-credit approval for existing clients, giving more reasons to keep coming back to the same provider.
Generally, the two main competitors to a vendor financier are cash and the customer’s house bank, says Rees. Both provide a cheaper alternative to vendor finance – which is why the vendor financier should focus on quality of service to present its proposition as the most convenient.
“I think the vendor finance partnership should always be able to make a more compelling offer,” Rees says.
“A house bank should never be able to beat the service level, the residual value you are prepared to take, and the added value you can bring to the product.”
Not all vendors trade equally, of course. A manufacturer with cross-border operations will require a different approach from a local distributor. That does not mean a vendor finance programme can stop at brand level, without market-specific strategies.
“With manufacturers, [our strategy] is to be the leader in the market where we operate,” says Pascal Layan, chief operating officer and head of international business lines at BNP Paribas Leasing Solutions.
“When we discuss solutions with the vendor at a corporate level, we know that we are able to deliver similar solutions in different countries. We can negotiate at a central level and then deliver an offer a credit risk approach which is very consistent from one market to another.“This is something that is appreciated by manufacturers – the fact that they do not have to discuss with 10 or 20 people on a local basis; they can discuss with my central team, then work with local teams.”
A cross-border footprint also offers possibilities for developing one’s own vendor financing network, outside frameworks governing relationships between a manufacturer and its distribution network.
“We are in contact with the dealers through the manufacturers, but we have also been able, thanks to footprint in multiple countries, to develop relationships with the dealers that fall outside the standard manufacturer agreement,” says Layan.
“For example, in IT and office equipment, we sometimes work with multi-brand dealers.
“We try to offer all possible solutions in the market. Of course, we know markets have different levels of maturity, but we want to have the manufacturers to increase sales by developing new approaches that meet customers’ expectations.”
Partner Engagement
Partner engagement is fundamental. Keeping the relationship between lessor and vendor is key to the success – and survival – of a vendor finance agreement, says Richard Guilbert, partner at Invigors EMEA and a colleague of O’Brien.
“There has been a tendency on the part of lessors in the European marketplace, to do some good planning, to implement [the programme] properly, and then to just let it run itself, without managing it actively on an ongoing basis,” he says. “That is where programmes can fail, and have failed.”
If parties want to avoid headaches later, it is a good idea to draw up a covenant, a set of underpinning principles, at the outset of the agreement. This also acts as a way of knowing whether the partnership is a good match in the first place. Are lessor and vendor looking at the same revenue objectives, the same commitment horizon?
“One of the issues, sometimes, with traditional vendor finance is there might be a misalignment of strategies and objectives of both parties,” says O’Brien.
“For example, the finance partner is often eager to start earning money from the relationship,” whereas the manufacturer might be looking at other KPIs, like volumes.
Guilbert agrees: “I have seen many a programme fail because the culture of the lessor and the culture of the manufacturer were never going to fit in a million years,” he says. And even if there is a fit, it is up to the two parties to keep the initial spirit alive. “Why do things go wrong? It is probably because the relationship is not being properly managed” he says.
“I have seen that happen: a programme is planned, implemented and managed, and then the lessor starts de-skilling the level of people on the frontline, because they want to use them somewhere else.
“From the manufacturer’s side, if they do not stick to some of the basic principles that were set up at the outset – for example incentivising salespeople properly around finance – you get to a blame-storming culture where it’s always the other person’s fault. At the heart of [everything] is relationship management; a lot of things stem from that.”
The relationships involved in a vendor finance agreement take effort, on both sides. Surely, then, setting up a captive unit is a way of streamlining one’s financing proposition?
As it turns out, there are pros and cons to switching the in-house finance model. “We have been working with manufacturers for 10 years,” says Guilbert.
“Previously they had been using only third-party finance, and they decided, following the crisis, to set up a captive.”
“During that transition, of course, they were building third-party financing, but also starting to build their own captive book, and developing that knowledge and expertise. It’s a tough balance, because what happens when you stop providing bank-owned lessors with a steady flow of business is that they lose interest to some degree, and so you have to manage that relationship very carefully.”
Guilbert continues: “That is a feature, certainly, of the last 10 years, post-crash: manufacturers looking at a captive model to give them some stability in times of crisis.”
External Partner
One argument in favour of keeping an external vendor finance partner, on the other hand, has to do with regulation. Not all manufacturers are prepared to have a bank within their organisation, with all the capital requirements that go around it.
Sometimes, the captive unit might grow so big and diversified, it becomes difficult to present investors with a rationale for it.
Rees says this was the case with GE Capital: “It got to the point that the stock market did not know what it was looking at, because it thought it was looking at a manufacturer, but actually the majority of the balance sheet was a financial services company.
“It used to be the case that it was the endgame to have a captive, but I think it is reversing a bit now. You see organisations [divesting captives].”
Rees continues: “One of SGEF’s straplines is that we are better than a captive, because we aim to give the same service and support that a captive would normally give to the manufacturer, but we take all of the balance sheet [load].”
Some vendors might choose to go for a joint venture. A recent example is the joint acquisition of Opel/Vauxhall Finance by Banque PSA and BNP Paribas.
Fiat Chrysler’s FCA Bank is 50% owned by Crédit Agricole, and Guilbert recalls how Dell Financial Services, where he used to work, started as a joint venture with Canadian financial services group Newcourt, before becoming a full captive and eventually being incorporated in CIT.
“The joint-venture model really does make sense if you have done your planning properly, and conclude that, actually, the best outset is to create something that, structurally, is going to last a long time,” says Guilbert.
“You have to be very sure that, at the core, every party has an equal interest.”
Still, not all vendors – especially ones with smaller-scale operations – might want to tie themselves up in exclusive finance agreements, with all the relationship management and liaison they entail.
With that in mind, broker Midlands Asset Finance (MAF) launched a vendor finance variant on its Asset Finance Compared website. Vendors receive a bespoke landing page for the comparison tool, which then presents customers with what MAF’s system thinks is the best quote from the most appropriate funder. This way, the vendor is not tied to a single funder, whose offer might not suit all clients.
“What it’s doing is giving speed of delivery from the vendor, enabling a faster service to the end-client,” says David Chapman, director and head of business development at MAF. “It’s a win-win for everyone, really. There is a wider variety of funders, and more choice to the end client.”
“We believe [vendors] could offer their clients a choice of funders, so they get options and feel they are getting a wider funder base, rather than being offered just one rate which would lead to more competitive rates for the end purchasers.
“We feel that by doing various checks up-front, they are getting a decision in principle which should be mirrored when they get the final acceptance from the funder.”
Managing director Sue Chapman says the broker’s tool is also a way for vendors to hedge against fluctuations in a bank’s risk appetite. “We also know that the banks’ credit appetite kind of moves in and out,” she says. “I think we are at the sharp edge in terms of our direct business: we know which funders like which assets. So we [can use that] to drive business to a particular funder, at a particular stage.”Most importantly, Chapman adds, vendors have the choice of whether to use a relationship manager for the finance brokerage programme, or to handle the programme remotely, so they can concentrate on their core business.
Vendor finance is growing in importance as customer expectations grow over affordability and cash-flow management. Additionally, the increase in asset-as-a-service propositions, spearheaded by the automotive and IT sectors, means vendor finance capabilities are essential to maintain a competitive edge.
“The shift to a usage model is a fantastic opportunity for the vendor business,” concludes Layan.
“It is a fantastic opportunity for us if we are able to adapt to the solution, to understand the asset and the remarketing systems.” <
