VENDOR FINANCE: THE MORE IT CHANGES, THE MORE IT STAYS THE SAME
By Dexter Van Dango
Vendor finance has seen cycles of both innovation and stagnation, and Dexter Van Dango has worked and written about the industry long enough to see it all. While he views the current landscape as stale, he also sees the most exciting advancements occurring within the independent space, rather than with banks.
When it comes right down to it, the vendor finance segment of the equipment leasing and finance business has become stale, boring and bereft of innovative products and services.
Six years ago I wrote an article predicting the future of vendor finance. One area addressed in the article was the vendor program agreement. I wrote:
“Documenting the relationship between the vendor and its funding sources will continue to evolve. Vendor program agreements — the almighty VPA — have already undergone a makeover. Gone are the lengthy documents with loads of representations, warranties and indemnifications up the wazoo. They have been replaced by kinder, gentler versions. But don’t mistake shorter for simpler. Agreements will potentially include layers of complexity regarding servicing, pass through billing and collecting of future services to be rendered, details regarding disposition of remaining investment in residual values, details defining rights to repurchase the portfolio and other details referencing customer control.”
This prediction has come to pass. Vendor program agreements are more complex today than ever before.
At the time I wrote the article, I felt the primary driver for the increased level of complexity in VPAs was going to be the increasing demand for utility type financial products. For the past several years, customer demand for pay-as-you-go products and services has influenced most of the market’s vendor finance players, including banks, independents and captives, That influence has been increasing with the advent of the gig economy. However, the overall market has, for the most part, failed to produce innovative solutions to meet said demand.
I wondered why the market has yet to produce a viable consumption solution that meets the usage-based demands of customers. I contacted several of my LinkedIn connections to request responses to specific questions related to this topic.
Not Much Has Changed
To Jonathan Fales, director at The Alta Group, I asked, “In what ways can captive finance companies harness customer demands for outcomes versus ownership of the equipment that produces those outcomes?”
Fales admits that, despite all the acclaims, “Not much has changed in a year, has it? Services continue to grow for most IT vendors as a percentage of total revenue, but I still haven’t seen a ‘pure’ services financing offering come in the market. One or two lessors announced utility-like offerings for services financing over the last year (Cisco has an interesting one), but last I looked, there was still either a minimum payment or a vendor backstop required. And we all know why: bank regulations and credit concerns for the bank lessors and balance sheet management issues for many of the captives.”
Fales’ observations mirror my own. There have been very few usage-based products brought to market that deliver outcomes versus equipment. Customers are looking for copies and printed materials, not multi-function copiers. They want delivered goods, not trucks, or scan results, not diagnostic imaging equipment. Today’s buyers seek outcomes, not the capital equipment required to produce those outcomes. But without the required minimum commitment for copies, deliveries, x-rays, etc., no financial institution will participate in the transaction without some form of backstop from the vendor. Additionally, many of the products typically financed in these types of transactions go to market via two or three tier distribution. There may also be a distributor and a dealer between the OEM and the customer, further increasing the level of complexity for each interaction.
As vendor finance transactions face increasing levels of complexity, it’s no real surprise I received a response from Adam Warner, president at Key Equipment Finance, when I asked him about what factors contributed to Key’s decision to exit small ticket and to focus on vendor programs with larger transaction sizes.
“At Key Equipment Finance, our priority always has been — and always will be — focusing our efforts where we can provide the most value to our clients. Over the past several years, we have been transitioning to larger-ticket manufacturer and vendor relationships. We have found this is where we have the best client engagement, and it is our strongest competitive advantage,” he says.
Greater Attention to Detail
Warner then explains that the changing nature of transaction complexity requires greater attention to detail. “We see the continued shift toward more collaborative and complex nonstandard financing agreements as one of the biggest factors impacting the industry right now. It is therefore critical that we continue to prioritize the vendor relationships for which we can add the most value and collaborative support to deliver financing solutions that meet the evolving needs of the market.”
Warner’s reference to nonstandard financing agreements is another reason why VPAs have become more complex. Vendor program agreements need to cover a broad array of product and service transactions, including hardware, software, services and maintenance, with portions delivered at commencement and others delivered throughout the term. The VPA spells out in detail the responsibilities of each party.
Being one of few remaining long-standing independent lessors, Med One Group isn’t restricted by bank regulations or stringent policies and procedures. As CEO, Larry Stevens gets to decide where he rolls the dice and when to take on risks that many other lenders prefer to avoid. I asked Stevens how his business model allows Med One to take on cancellation risk by offering shorter than normal lease terms. Stevens says, “Unlike most other financially focused companies in the vendor finance arena, Med One has two unique characteristics that allow us to offer programs that may pose a risk of early cancellation of a given lease. We have invested significantly in our infrastructure that deals with ‘off lease’ equipment, [including] a focused sales group that re-deploys equipment into a secondary use. We also specialize in only one type of customer (acute care hospitals), and we tightly control the types of equipment that we would be willing to take back early.”
Med One Group’s willingness to take back equipment and redeploy it stands out among non-captive industry players. I asked Stevens how he manages that risk. “An early cancellation capability is not something we offer universally, but when it makes sense to us and helps our customer, we will do it, and we are very pleased with the results that this capability has allowed us to achieve,” he says.
His response demonstrates the flexibility and value-add that a well-run independent can bring to a vendor relationship.
Other independents have pursued other options. TimePayment is a fintech company and small ticket vendor finance player with a platform that has relied heavily on utilizing technology to gain efficiencies. In April, TimePayment acquired LeaseQ and Kingswood Leasing. I asked Jay Haverty, TimePayment’s president, how the recent acquisitions complement the delivery of services from TimePayment’s already technology-driven vendor finance platform.
Haverty says, “Our business remains focused on specialty markets and special situations in vendor finance where our ability to operate across the credit spectrum with virtually instant, risk-based transactional capability plays well. We’ve been on a nice run of growth and, to keep this going, one of our strategic priorities is to build and buy additional best-in-class, industry-
focused origination and delivery platforms that scale. The acquisitions of Kingswood Leasing and LeaseQ were a natural fit in this regard. They bring customer relationships and capabilities that align with our niche market approach. In particular, both have built great technology-driven platforms to support high volume syndications. These capabilities will allow us to expand our product suite in areas that go beyond what we typically keep on book.”
Both acquired companies also specialize in fintech, allowing TimePayment to enhance its technology platform with new products and processing capabilities. It is not surprising that an independent lessor would make that move. What is surprising is that bank lessors don’t seem to be taking a similar approach.
Over the years, I have been involved in the negotiation of many vendor program agreements. I have worked for privately-owned lessors, publicly traded lessors, and bank-owned lessors. Given the current market environment, I see the advantage going to the independent lessors. They don’t share the burden of regulatory oversight, “Know Your Customer” requirements, and other nuances inflicted on their bank-owned competitors. Independents, like Med One Group and TimePayment, can take on educated risks that many of their counterparts shy away from.
Then there are the captive lessors, whose missions vary from supporting the sales of their parents’ products to managing market penetration, customer retention, and overall profitability. Scan their web sites and you will find consumption-based product offerings. But as Jon Fales indicated, there always seems to be a minimum payment, minimum term or some form of backstop from the vendor. In truth, captives have the data to support taking on more risk than their finance and leasing company competitors. They know the behavioral traits of their customers and should be well positioned to make predictions on how their customers will behave, based on the analysis of historical data. However, it is not apparent that any of the captives are using their data to drive new products.
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