Also, if you’ve been following along, you’ll also notice they all have an increasing amount of vendor responsibility and risk. A referral program, while effective in increasing sales, is a very basic relationship, and carries little to no risk on the vendor’s part. In fact, it’s essentially a vendor putting our link on their website and saying “get your financing here”, where today’s topic – captive programs – involves the vendor acting as a quasi-finance company.

Captive programs are the hardest type of equipment financing / equipment leasing programs to describe, as they can take on all manner of individual aspects. No two captive financing programs / situations are the same (you fellow equipment leasing guys already know this.)

Essentially, here’s how a captive program works:

You have a vendor who wants their own finance company to help sell their product.

WHY would they want this? Because they generally want to control the yay/nay aspect of the transactions. They might want to do this because their product / industry is volatile, or perhaps they want to take more risks to get more of their product in the market.

A good example of this is GM and GMAC (when GMAC existed). GMAC was created to provide financing to GM automobile customers, and, especially early on, provided less-stringent lending criteria than a traditional bank. GMAC helped GM become, at the time, one of the largest companies in the world.

That’s just a very clear example of what a captive program can look like. But it’s likely GM funded GMAC themselves – usually, captive programs don’t quite work like that, and manufacturers come to a company like mine for help. Here’s how that works (again, in general).

A manufacturer decides they want a captive program. They create a subsidiary to act as the finance company. They also put in an influx of cash, as it’s expected defaults will be higher than normal. This cash is a reserve. Then, a company like mine funds the loans (loans we might not make otherwise), with the reserve protecting us against loss.

In a nutshell, that’s it. Here are a few other points about captive programs:

• Usually, the type of equipment financed is equipment that can be quickly resold in the case of default / repossession. Thus, a Captive Program really won’t work well with electronics / technology equipment that gets outdated quickly.
• Captive Programs are often seen as Loss Leaders. More often than not, they are expected to lose money for the company. The upside is greater market share, which can be exploited for profit later.
• You don’t see all that many captive programs out there. For many companies, Vendor Recourse is as far as they want to go. And I don’t blame them – captive programs should really only be considered if the increased market share will be deemed worth it.

Ok, there’s our four vender-lender equipment financing relationships. These were fun to write, as they allowed me to answer some common questions. But now, let’s get back to Section 179, because the end of the year is creeping up on us.

But, and this is to be expected, those topics are usually from the “buyer’s” perspective. However, every so often, I like to remind people of “the vendor side” of equipment financing. I’ve posted previously about using equipment financing as a marketing tool and the like, and over the next few weeks, I’d like to return to this “other side” and discuss equipment financing from the equipment seller’s point of view.

Let’s begin by introducing the four common types of Vendor/Lender relationships (heh – I like saying “vendor/lender”… it sounds like something that should be part of an NFL snap count… “Vendor/Lender 47 Right hut HUT!!!”)

Anyway, here’s an introduction to the big four. Future posts will explain each in a little more detail.

• Referral Programs – A referral program for equipment financing is typically the most common type of vendor/lender relationship. This type of customer finance program can be set up fairly quickly, and is essentially marketed as “equipment financing provided by XYZ Lender”.

• Private Label Programs – This is the logical progression from a referral program. With a private label program, the equipment financing company (us) almost becomes the vendor’s financing department in the customer’s eyes because some or all of the written material is in the vendor name rather than ours. This allows for better branding, and also requires a closer working relationship between vendor/lender. Oftentimes, promotions like “same as cash”, “0% financing”, and “skip your first payment” can be worked out.

• Vendor Recourse Programs – This is the next step, so to say… with Vendor Recourse Programs, the vendor wants to offer financing to a certain group of customers, sometimes without regard to credit history. In a nutshell, the vendor agrees to guarantee weaker credit transactions (there’s a lot more to talk about here – like I mentioned earlier, we’ll go over all of these in more detail in future posts.)

• Captive Programs – This is essentially an extension/modification of Vendor Recourse programs, and are often used with unique circumstances where a vendor wants to get their equipment into their customer’s hands, sometimes regardless of losses suffered from defaulted finance transactions (indeed, many captive programs are a loss leader… to give an example, think of a company offering special financing to rapidly gain market share in a new vertical. Might be a good way for the parent company to gain a solid foothold, even if it’s financing subsidiary expects plenty of short term defaults.)

Anyway, that’s your big four of the vendor/lender relationships. Like I mentioned, we’ll go over each one in the future. Stay tuned.

I can tell you what it’s not – it’s not taking finance payments on a kidnapping ransom (admittedly, that was a lame joke, but us equipment finance guys aren’t know for our quick wit… still, not bad for two seconds of thought!)

Anyway, Captive Financing is when a company – say a vehicle or equipment manufacturer – creates their own financing company for the purpose of differentiating themselves from the competition. The thought is, if you have the financing in-house, and it only takes a trip into the finance guy’s office, the likelihood of a sale increases. If nothing, consumers (and businesses) like convenience. And buying something and getting financing right then and there is attractive.

However, a lot of companies have had trouble with their captive financing over the years – essentially, it hasn’t always proven profitable. One reason – at least in this finance guy’s opinion – is the overall focus of the company is to make product, and then make sales. The focus isn’t on financing. In short, financing equipment is not usually an equipment manufacturer’s forte’. Thus, the equipment financing end suffers some – it’s mainly there to help the sales end, and little more.

Well, I’ve seen a trend lately. Without mentioning any names, I’ve seen some of the smaller, lesser known captives cease to exist, and I have heard rumblings that some name ones might throw in the towel. And you know, that’s probably a good thing. Companies like mine are perfect to pick up the slack, with little effort from the manufacturer. In fact, equipment financing companies like mine have made doing business with them so simple that the manufacturer can have the same office, and even the same finance guy as before. Just the credit application goes to an equipment financing company instead of the in-house financing company. And the purchaser? They still get a great rate and fast approvals.

It actually makes a lot of sense. I mean, companies hire ad agencies, marketing companies, etc. Why? Simple – it’s cheaper and easier to hire out than to do it yourself. It’s the same thing with an equipment finance company – better service, and much easier.

There’s really no difference… well, ok, ONE difference: We won’t lose anybody money.