Vendor / Lender equipment financing relationships – Vendor Recourse Programs

By | September 13, 2011

Lender equipment leasing relationshipsIn previous posts, I discussed several types of “vendor – lender” business relationships (essentially, that’s the relationship between an equipment financing / equipment leasing company like mine, and our customers, the equipment manufacturers and distributors.) We already went over Referral Programs and Private Label Programs, and today, we’ll talk about the next level of the vendor-lender relationship: Vendor Recourse Programs.

Put simply, a Vendor Recourse program is an equipment financing relationship where the vendor takes more of an interest in who gets accepted for equipment financing, and they also take on some financial risk as well, because the vendor guarantees payment for specific transactions and/or certain groups of transactions referred to as “pools”.

It might be clearer if I give an example:

Company XYZ makes equipment for, say, the hotel industry. The company knows the hotel industry has seen better days, but they are hopeful a new piece of equipment they developed is going to help their customers become more profitable. It makes sense that they want to increase their sales and get this new piece of equipment into as many of their customers’ hands as possible… but how to do that when the industry isn’t going so well? So they come to an equipment financing company like mine.

We take a look, and see that there are indeed going to be a lot of denials, because the industry isn’t doing that well as a whole. Company XYZ knows their customers, though, and is confident on the creditworthiness of such, even if the industry is down a bit. But obviously, they aren’t equipped to become an equipment financing company. Thus, we work out a program where we will provide the equipment financing (even financing some riskier deals), and company XYZ will “guarantee” the repayment on a certain percentage / group of transactions.

Simple, right? Company XYZ essentially says “in order to increase our own sales, we’ll take on some of the repayment risk. We’re ok with this because the sales increase is worth it, and we also know our customers / industry.”

Usually these types of programs work really well, but I do want to throw one bit of caution out there – sometimes companies (hopefully not company XYZ) overestimate their customers. Or should I say, they UNDERESTIMATE the risk of default. I see it all the time – companies set aside a reserve for a vendor recourse program, and it always gets used up, as companies seem to default right around the industry average. However, the increase in sales is usually worth it (I’m not saying a vendor recourse program isn’t profitable – it is. Just know that defaults will happen right around the industry average.)

I hope that clears up any burning questions you had on Vendor Recourse equipment financing programs. There’s one more left – captive programs. We’ll get to that one in a few posts.

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