Vender-Lender Equipment Financing Relationships – Captive Programs

By | October 27, 2011

Vender-Lender Equipment FinancingOk, in our little vendor / lender equipment financing relationship series, we’ve come to the final one – captive programs. If you recall, the first three were Referral Programs, Private Label Programs, and Vendor Recourse programs.

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.

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