Survey: Vendor Finance

Getting the processes right to ensure a vendor finance
operation runs smoothly is not easy to do. Is there a perfect
solution?
 
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Way back in 2001, Tim Conroy, the then director of global vendor
partnerships at DaimlerChrysler Services, said in a report titled
Global Alliances & Vendor Financing… Success Is In
The Detail that in the future vendor finance companies
will have to make efforts to better understand their customers, and
also improve their back office capability, particularly in new
markets. The key areas to focus on, he said, are cultural barriers,
legal systems, credit and underwriting guidelines, asset and
portfolio management, and collection and recovery protocol in each
country of origination.

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Since then, vendor finance businesses appear to have grown
dramatically, new entrants are beginning to make their mark, and
Conroy’s predictions about the rising importance of new markets
have begun to ring true.

Take, for example, some of the data we have accumulated for this
report (pages 25-31), where we look at some of the processes
involved in putting deals together.

BNP Paribas Lease Group UK has approximately 70,000 vendor
finance clients (profiled on page ??), a phenomenal number, and a
reflection of how vendor finance lies at the heart of its
activities, and also those of its French parent leasing company.
Key Equipment Finance, a relative newcomer, operates in 26
countries worldwide, many of which are in Europe, while De Lage
Landen, a truly global player, has vendor finance assets under
lease worth €13.7bn – almost the entirety of its asset
portfolio.

Managing these vast swathes of debt, assets and customers is no
mean feat. It is a clever science, for instance, to know just how
many risk managers should be engaged in a single large deal to
ensure costs are kept down, and how many asset finance credit
control staff should be used in a point of sale finance
transaction. None may be the answer, but that depends on the amount
of automated responses available.

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Consequently, there are many barriers to entry, but even for
those with experience, getting it right is never easy. “Vendors
increasingly want global solutions,” said Terese Kramer, asset
management expert and the principal of TK Consultants. Kramer’s
advice is that all companies offering vendor finance, whether they
are large or small lessors, need to focus on a flow approach to the
business, with as little handling as possible touching the sides. A
good way to illustrate the potential problems, she says, is to ask
‘Whose customer is the end user?’ The dealer, the lessor and the
manufacturer will all say it’s theirs, so it’s clear the three
parties have slightly different agendas.

Kramer advised: “There’s natural tension between vendors and
potential lessor partners in a number of areas. For example, the
vendor wants to gain market share by offering leasing, but the
credit risks are a constant concern to the lessor. The successful
vendors and successful vendor relations are the ones that deal with
these issues on day one.”

Worryingly, a 2005 survey by Invigors, a consultancy, of
international manufacturers highlighted discrepancies between the
vendor’s expectations and the finance provider’s performance in
terms of selling more equipment, delivering sustainable competitive
advantages, increasing repeat business, and providing low cost
financing. “Feedback from vendors tells us there are a number of
areas of potential gain where finance providers have talked a good
game, but haven’t made sufficient effort to work with the vendor to
quantify or prove the basic value proposition,” says Richard
Guilbert, a partner at Invigors.
 
However, Guilbert marvels at the variety and flexibility of vendor
programmes, saying: “Each programme is different and that’s both
the joy and the frustration of this business. Providing finance to
consumers for their computer at home has a different approach to
providing excavators to a major construction company. Both can be
vendor finance but will have completely different characteristics.
The cost depends on how big a programme will be and how many
countries it will be offered to.”

Challenges for new players

New players in the UK leasing market should be aware that they
are entering a very mature, competitive industry. BNP Paribas Lease
Group managing director, Mike Dix, declared: “It has only grown by
two per cent in the last 12 months, most of the big beasts of the
jungle are over here and there has been price pressure over the
last year or so.”

A wide variety of banks, independents and consultants already
operate in the sector, and Andrew Cameron, of Quartz Finance,
points out: “You must make a clear distinction between companies
that have their own balance sheet and those who supply advice to
them. Comparing us to someone like Barclays is not comparing like
with like.”

Alan Leesmith, a partner at The Alta Group, a consultancy,
believes that a vendor finance business is, in reality, a marketing
company, and a vendor lessor is there to help a vendor sell its
product. He outlines how this differs from direct, end-user
leasing, saying: “A lot of people will say they are in the vender
leasing business, but very few actually are. The key thing is that
there is a follow-on relationship in respect of 100 per cent of
transactions. A lessor is not selling goods or money but marketing
and administration services, and those services consist of multiple
components.”

Designing products that will suit the needs of different sized
companies in different sectors requires a range of local, global
and product-specific approaches. 

Alun Richards, managing director of Key Equipment Finance’s
European region, identifies some of the problems this can cause.
“Challenges in setting up a vendor finance operation are the ones
you would expect – multiple languages and jurisdictions and the
diversity of countries – and this is a hurdle to overcome for those
companies offering a consistent approach across Europe,” he says.
Richards also sounded a note of caution: “Not every foreign economy
has a high take-up of lease financing and if they do not want to do
so you will find it very difficult to convince them.”

Successful vendor finance partnerships can be highly efficient
and extremely profitable, but don’t underestimate the intensity of
the administration involved. There are huge potential markets in
Eastern Europe and the old Soviet Bloc, but people with local
knowledge are needed on the ground with strong local knowledge to
access them, and that’s just the very start of the
relationship.

  Neil Kennett and Brendan Malkin

Vendor Finance: Tips for setting up a successful vendor
finance company

The approach of the lessor should be the same no matter how
large the companies involved, or the size of the deal in question.
Colin Taylor, of Gresham Financial Services, asserts: “All of them
will be striving to get as much business done as quickly as
possible with the minimum amount of rejections.”

Doing so is easier said than done. Richard Guilbert, a partner
at the Invigors consultancy, said parties to a vendor finance
transaction should know right from the beginning where the
manufacturer sits strategically with their other services. He also
warns new players in the market not to choose the first partner who
comes along, but to shop around.

Besides this, most interviewed raised the oft-quoted
requirements of ensuring staff have product knowledge and the need
for a top-notch IT system. While all these are important, many
other, perhaps more subtle factors go into explaining why some VF
programmes fail and some succeed. One UK bank, for instance,
apparently lost most of its VF staff because it only had one credit
controller to make decisions on hundreds of deals. The unthinkable,
it appears, does happen.

In a case study on appointing Computron to deliver a new lease
lending administration system, Godfrey Smith, finance director of
Fleet Business Credit (FBC), listed the key IT requirements as:
multi-currency support for current/future European subsidiaries,
the ability to prepare consolidated accounts in accordance with UK
Generally Accepted Accounting Principles (GAAP), a report writer
that supports Group reporting, and the ability to support FBC in
London but also provide remote access, with screens formatted in
the local languages and with local reporting requirements.

Alun Richards, of Key Equipment Finance, thinks that people
should come first. He said confidently: “The sole most important
thing is without question having buy-in from people on the ground.
The vendor partner has to believe that there’s value in it. It’s
that crucial confidence factor to say, yes, I will introduce this
person to my customer.”

Both Alan Leesmith, of the Alta Group, and Terese Kramer, of TK
Consultants, agree that, while IT is important, relationship
management is the make or break aspect of a deal. Leesmith
comments: “The lessor has to establish a close relationship with
the full range of activities that are involved in the vendor’s
business and do so on a consistent and ongoing basis.”

Giving a practical example, Kramer reports: “We have found that
everyone in the team must understand the equipment they are working
on, so we suggest inviting the manufacturer to get all the leasing
company departments involved when they launch a new product or
conduct road shows. It is an inexpensive activity that builds
cohesion and commitment.”