As the value of lease portfolios spiral downwards, are trade
credits the way forward?
Finance subsidiaries are feeling the pinch as the resale value
of their assets continue to decline amid growing fuel prices and
slackening customer demand.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Faced with a decline in income as a result of this sharp drop in
second-hand equipment values, some companies are now seeking new
ways of ensuring their balance sheets remain healthy.
It is understood that one of the world’s largest vehicle and
fleet management companies, LeasePlan, which is 50 percent owned by
the Volkswagen Group, has begun offering customers extended lease
terms so by the time assets come off lease they should have
recovered their full value. Others are said to be doing the
same.
The knock-on effect the economic climate is having on asset
values is also forcing more companies down less mainstream paths in
an effort to get rid of these assets from their balance sheets.
Last month Benchmark Consulting International, a UK financial
services consultancy, told Leasing Life it is in talks
with a number of independent leasing companies about providing them
with so-called trade credits.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataTrade credits are notoriously odd financial creatures. In the
context of a leasing deal, a leasing company would offload its
assets – particularly those which have lost much of their market
value – on to a trade credit company (TCC). The sale price would be
something like the book value – rather than the market value – of
the assets.
The TCC would then sell the assets to a third party – usually at
market value rate – and after having pocketed its commission pay
the original lessor for the assets it bought. This payment would
comprise of cash – made from the sale to the third party – plus
trade credits.
The lessor could exchange these credits for assets from its
suppliers, which in turn could do the same, and so on down the food
chain. Lots of companies do this, particularly those involved in
providing international services – including the likes of
Bombardier, DHL and Proctor & Gamble. Carbon credit specialists
are also understood to be looking at trade credits. FASB even has
guidance for the accounting of credits.
Benchmark Consulting managing director Guy Doole says trade
credit could work particularly well with the vendor finance
industry.
Doole adds: “TCCs offer new ways to relieve some of the pressure
and uncertainty.”
Meanwhile, international TCC, Argent Trading, which is
headquartered in New York and includes most Fortune 100 and Fortune
500 companies among its clients, has reported significant increase
in revenues linked to higher demand for its services.
In recent months, Argent has opened several new offices in
Europe to meet the demand.
“Corporate trading of this kind is the perfect tool when a
market is in trouble,” says spokesman Alberto Corral.
