Some would argue that the captives always have the advantage over their competitors because they hold all the cards. They produce profits for their parent company from the sale of the equipment. They control the earning asset on their books and take profit from pricing dynamics, including the tax benefits and perhaps even the end-of-term gains. They control the messaging to their clients through periodic invoicing and they hold the flexibility to upgrade equipment throughout the term in order to maintain customer control. But despite their agility and flexibility, captives can be beaten at their own game. It takes one to know one.
One captive can effectively take out another captive by offering a better deal. The deal can come in the form of better pricing on equipment, better terms on financing, or acceptance of the competitor’s equipment and payoff of its existing contracts in exchange for signing the new deal. This horse trading takes place nearly every day between Caterpillar and John Deere, GE and Siemens, Canon and Ricoh, HP and Dell, or between Paccar and Daimler, for example. Captives will commonly take on excessive risk when a traditional funding source might otherwise shy away.
Today’s banking world has undergone a total remake. Discretion has been taken out of the equation. The new world order is rules-driven. The regulatory environment is daunting. Whether it is the Dodd-Frank Act, the Consumer Financial Protection Bureau, the Gramm-Leach-Bliley Act or the Office of the Comptroller of the Currency — someone is always looking over the shoulders of the banks. And even if they are not a bank but are deemed to be a Systemically Important Nonbank Financial Institution, many of the same rules apply.
The impact of this tightened regulatory oversight has made it difficult for banks to differentiate themselves among the competition. Some believe it is the banks’ fault that pricing has been driven so low in the current market. Banks can no longer stretch or accommodate as they once did. The rules forbid the banks from straying from policy.
It’s a wonder that the banks are able to compete in the vendor space at all. Or is it? Lest we not forget … the bankers have all the money! It is the banks that the captives turn to when looking to reduce their concentration risk. And it is the banks who offer the most attractive pricing. Banks can and do play a vital role in vendor finance. Referencing the 2013 Monitor list of the 25 Active Players in the Vendor Channel, all but one of the top ten names was a bank or bank subsidiary.
Since most banks look alike and are restricted in how much leeway they can exercise with vendor clients, they leave the door open for more nimble competitors: the independents. Independents may have higher funding costs. They may have less sophisticated back office systems and may or may not have fully integrated front end systems to accept electronic receipt of credit information. These potential disadvantages are easily overcome by what independents do possess — independence. Sure, they may have restrictive covenants with lenders and have triggers tied to key performance indicators, but on that one transaction identified as “strategic” by his vendor partner, the independent has the discretion, the leeway, to make a relationship call and not worry about the consequences with the auditors.
Many office equipment dealers have developed a dependence on the service levels delivered by GreatAmerica Financial. Medical device manufacturers rely upon the audacious approval rates and seemingly unsophisticated documentation requirements of Med One Capital. Point-of-sale equipment specialist Lease Corporation of America finances products that other lessors avoid. Creekridge Capital continues to display impressive growth in the medical and technology verticals. Element Financial is rapidly growing aviation, fleet and rail books of business: aircraft, helicopters, trucks, trailers and railcars. It could be LEAF Commercial Capital or Vision Financial Group or Direct Capital; the point is, they all play a role in the vendor channel. They have the flexibility to do what others cannot.
Even brokers can play a role in vendor finance. Some deals are simply too hairy for a traditional funding source. Trying to explain a credit decline to your vendor partner can cause heartburn. Having secondary and tertiary sources for tougher credits can help to appease the situation. Brokers use structure to make ugly deals palatable.