A growing number of manufacturers across many
industry sectors have established captive finance companies to
support their sales efforts. There are also several successful and
long-established active captives. However, very few have
experienced a recession on anything like the scale that is
currently challenging the industry.

Captives are traditionally funded by either
their parent company or third-party finance companies on a full or
partial recourse basis.

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As liquidity dries up, the availability of
that funding reduces and prices increase, and some captives may
begin to feel vulnerable and question their role and value to their
parent.

However, equally, while there is no doubt that
a captive’s value will, and should, be reviewed by the parent as it
seeks to maximise the return generated by its available funds,
there is a strong argument supporting the hypothesis that a
captive’s role is even more important in a recession than in a
buoyant economy.

While a manufacturer might not regard its
captive as a core business and may, therefore, be reluctant to use
its limited cash resources to fund the captive, an indisputable
certainty for every manufacturer is that selling its products is
the core activity.

Therefore, the role of a captive as a sales
enabler and provider of funding to the customer takes on even
greater importance in times of limited market liquidity. After all
if the manufacturer’s target customers do not have cash or
available credit lines then they will not be able to purchase the
manufacturer’s products.

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Consequently, ensuring that the captive has
access to adequate funding is of major importance for the
manufacturer. While this may necessitate it gearing up to fund the
captive, there is no doubt that the funding will be critical in
helping to close sales and in driving the core business.

In the current market conditions, facilitating
the availability of funding to customers is a critical element in
the sales process. This is a significant strategic tool for seizing
opportunities out of adversity.

The author is a principal at The
Alta Group and previously held senior management posts at De Lage
Landen, CIT Group and Svenska Finans International