By William G. Sutton
One of the lingering negative effects of the recession on companies has been the decreased availability of access to capital. A January 2012 study of small and mid-sized business owners reported that 49 percent of survey respondents said lack of bank loans restricted growth opportunities.
For small and medium-sized equipment manufacturers and vendors, the credit crunch has squeezed them from both ends. Their access to capital to acquire equipment has been reduced, and at the same time, their customers have less access to capital to buy their products.
As a result, many equipment manufacturers and vendors have learned the benefits of equipment financing as a way to acquire equipment for themselves. However, many don’t realize that there are options available that can help them expand their markets to businesses that do not have cash readily available or have traditionally used bank lines of credit. By establishing a captive finance capability, you can open up a valuable opportunity to grow your business through one of the following financing models:
Developing financing capabilities in-house
Creating a formal partnership with one or more finance sources
Creating an informal partnership with multiple finance sources for one-off transactions.
Following are five key reasons to consider offering financing to your customers:
1. It’s a growing trend
A study by the Equipment Leasing and Finance Foundation (ELFA) shows that among manufacturers which offer financing for their equipment, approximately 30 percent of all equipment sales are financed by the manufacturer or its finance partner. That rate is increasing each year as the financing division plays a more important role in the organization’s overall strategy. According to the same study, of all manufacturers which offer a financing option to their customers, 67 percent expect equipment financing will increase as a percentage of their manufacturer sales. The growth of this trend is largely due to the benefits derived from offering financing and its business impact.
2. It builds customer relationships
Building customer relationships and improving customer retention are key benefits of establishing a finance capability. It allows you to build rapport and trust in addressing customers’ financial issues, as well as answering their questions about the equipment. It also extends the relationship into future transactions since it provides opportunities to offer advice and assistance with end-of-lease/financing term decisions such as whether to purchase new or existing equipment. In addition to developing follow-up selling opportunities, it helps build long-term relationships for repeat business.
3. It provides incremental income
Providing a financing option can offer benefits, including facilitating equipment sales and generating additional revenue. In addition to an increase in interest income, additional revenue may be generated if the equipment can be sold for more than its remaining book value at the end of lease.
4. It creates value
Offering financing creates value for your customers by saving them money, getting them better terms, and helping them stay current. One way they save money is through the manufacturer’s knowledge of the equipment and ability to resell pre-owned equipment. This may enable the manufacturer to take additional risks on the residual value, which lowers the customer’s monthly payment.
Customers may get better terms when they purchase equipment that might be otherwise delayed because of lack of financing elsewhere, and the manufacturer is willing to provide better financing terms. Additionally, value is created when a customer takes advantage of leasing/financing since it eliminates the risk of them owning equipment that is technologically obsolete.
5. Industry expertise is available to assist you
An important consideration about offering financing is that there is plenty of assistance that can help you determine and establish the captive financing option that’s appropriate for your business. The non-profit ELFA has an online “Manufacturer & Vendor Resource Center,” which contains strategic, legal, financial and operational topics that manufacturers should consider when developing or enhancing their finance capabilities. The website also contains searchable databases to find financing partners and service providers to assist you.
Increasing knowledge of captive financing among small and medium-sized manufacturers and vendors will pave the way to greater growth opportunities for their businesses and the economy.
William G. Sutton, CAE, is President and CEO of the Equipment Leasing and Finance Association (ELFA), the trade association that represents companies in the $628-billion equipment finance sector, which includes financial services companies and manufacturers engaged in financing capital goods. ELFA has been equipping business for success for more than 50 years. For more information, visit www.ELFAOnline.org. © Equipment Leasing and Finance Association 2012. Reprinted with permission.