The economic downturn has prompted dramatic changes in the financial sector, with banks retrenching and revising lending policies.

This has given manufacturers the opportunity to step in and use their own knowledge of customers and assets to develop in-house captive finance solutions.

In a recent survey, the UK’s Finance & Leasing Association (FLA) has shown that demand for asset financing is recovering, with businesses increasingly turning to leasing to fund investments.

In the last year alone, there has been a 26% rise in funding specifically from the manufacturing sector. In the year ending March 2012, new leasing agreements in the manufacturing sector rose to £1.088bn, up from £864m compared with the previous year.

By setting up its own captive, a manufacturer is able to provide a customer focused solution, maximising the benefits of its knowledge of products, markets and sectors to drive a competitive advantage.

Previously there were three distinct routes that a manufacturer could take to provide finance to their customers:

  1. Broker the business out
  2. Work with a bank or financial institution to form a joint venture
  3. Set up a captive

The captive is now a key solution for those manufacturers wanting to increase both their profitability and market share, especially as viable alternative options are limited.

Captives ultimately use the strength of their balance sheet to lend directly to their customers. Manufacturers are now likely to have strong balance sheets as the recession has forced many of them to reduce their debt and bolster their cash reserves. Many are now sitting on balance sheets that would be the envy of most banks, which provide them with a secure foundation to build new captives.
Some of the key benefits of setting up a captive include:

  • Ringfencing and retaining existing customers
  • Offering added-value services such as maintenance, insurance and asset disposal
  • Providing a one-stop solution
  • Increasing profits for the manufacturer by retaining revenue streams
  • Offering bespoke packages
  • Enable secondary markets via asset remarketing

Removing barriers
The question of why set up a captive has now moved onto that of how to set up a captive.

Establishing a captive would once have meant a substantial investment in infrastructure and staff, which had previously acted as a barrier to entry.

Now by selecting a proven business process outsourcer (BPO), many of the services and components needed to build a captive can now be secured quickly and cost effectively.

Full disclosure – I work for a business process outsourcer, but I do genuinely believe the best route to captive status is to outsource, and here is why:

By using the knowledge and experience of the BPO to establish the infrastructure, and help support the captive, the manufacturer is far better equipped to meet the demands of its customers.

  • An experienced BPO should be able to demonstrate:
  • Existing customer base including captives
  • Business continuity
  • Servicer rating
  • Financial strength
  • Knowledge of the asset finance sector and its requirements

A BPO will also have the benefit of dealing with different client’s portfolios. This added experience gained from various portfolios can be applied to help develop the client’s new captive. Key staff within the BPO will have developed the knowledge of multiple scenarios and customer requirements, enabling them to offer the client a different perspective and alternative solutions.

Setting up a captive is always going to be a major step for any manufacturer, as they are using their own balance sheet as a lending vehicle. However by using an experienced BPO, with proven flexible solutions, the captive can limit some of the potential risks involved.
From the BPO’s perspective the ultimate purpose of the relationship is to enable the client to focus on the core business, while taking care of the infrastructure and the support services. These can include:

  • A dedicated lease administration system
  • Billing and collection services including direct debit and invoicing
  • Arrears management
  • Financial reporting and production of management information
  • Dual accounting entries for European overage

By using the skill and experience of a BPO, the manufacturer can quickly reap the benefits of the captive whilst minimising the costs of setting up. This will enable them to focus on growing their core business without the concern of back office administration.

Ian Dennis is business development manager at LPM Outsourcing, a provider of services to the asset finance market