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Captive As a Service - Disrupting a Paradigm

Date: Jul 22, 2014 @ 07:00 AM
Filed Under: Vendor Finance

Recent trends in the marketplace indicate that vendor financing programs — specifically captive and quasi-captive solutions — are changing. There are now many options that make it much easier for today’s vendor to deploy a comprehensive customer finance offering that yields virtually all of the benefits of a traditional captive with none of the challenges or risks. Advancements in technology coupled with greater acceptance of business process outsourcing seem to be disrupting the build versus buy calculus. These combined forces have reduced the need for the huge investment of resources that was once required to deploy a customer finance solution.

The fact that a growing number of manufacturers, distributors and dealers — collectively referred to as vendors — include a customer financing option as part of their go-to-market strategy makes perfect sense because customers are demanding it. This is particularly true in technology and adjacent markets, where according to the Equipment Leasing and Finance Association’s 2014 Survey of Equipment Finance Activity report, new business volume in technology is up over 20%, with a significant amount of all technology related assets financed externally in some way shape or form. Leases, loans, lines of credit, or even credit cards either provided by the vendor or sought out directly by the customer are utilized more now than ever.

This explains why customer financing using a captive or quasi-captive program has long been a key strategy for vendors in many different industries. Account and customer control are at the forefront of their acquisition and retention strategy. Despite the benefits, there are barriers to entry that prevent many organizations from launching a true captive finance arm. Such barriers start with a formidably steep price tag coupled with the difficulty of balancing competing corporate objectives such as driving sales while managing risk.

In addition, beyond the obvious requirement for capital, in-house financing requires a tremendous investment in people, systems and an overall platform that requires deep experience to launch and manage. For many organizations, these requirements pale in comparison to the massive commitments of time and organizational energy that are required to deploy and administer a captive program.

After carefully considering the options, many vendors decide that an in-house solution may not be worth the investment of resources. In that case, the fallback option has historically been to select a single source financing program partner in order to deploy a “quasi-captive” solution. In this case, the barriers to entry are often replaced by a shift in control from the vendor to the finance company, which can result in the vendor itself becoming a captive to the program partner who owns the portfolio.

Hurdles that vendors face when considering a traditional captive program, coupled with the possible loss of control in a quasi-captive solution represent a critical gap in how the equipment finance industry meets the needs of the marketplace. Progressive equipment finance companies are exploiting the opportunities that spring from this gap by combining technological advancements with expertise in operational best practices to offer unique solutions for the vendor space. Vendors can leverage the capital and expertise of these companies to gain full access to the benefits of captive financing, with virtually no resource drain or loss of control that typically accompanies the initiative.

Depending on the approach, there are typically two forms the vendor finance program can take—the options are what we refer to as either the virtual captive or the Captive–as-a-Service (CaaS) model. In a virtual captive, the manufacturer employs internal human resources to facilitate originations, but relies on a finance company such as LEAF for operational support, capital to fund transactions and for portfolio servicing.

In the Captive-as-a-Service (CaaS) model, everything is outsourced. With the right financing partner(s) in place, vendors can today outsource their captive arm while enjoying the traditional benefits that a captive provides with virtually no drain on resources. The big question is whether the finance industry will recognize the opportunity and then step up to take advantage of it.

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Comments From Our Members

Kimberly Esposito
Thank you for an informative, timely piece.
7.29.2014 @ 9:06 AM
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