Take a memo: Your manufacturing equipment sales proposal should include the financing
William Atkinson, contributing editor -- Manufacturing Business Technology, 12/10/2008 12:46:00 PM
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Industrial equipment & machinery makers and IT equipment manufacturers know it’s hard to sell their products in times like these. One of the first objections customers raise is cost, quickly adding that while they would like to make a purchase, they just don't have the money in the budget.
Talking financing options with customers is an afterthought, but the fact is, it should be part of the sales process, according to Jonathan Fales, a principal with The Alta Group, a consulting firm with myriad North American locations that help companies identify the best financing options they can offer to their customers.
"One thing that [many] manufacturers’ sales reps never bother to discuss with customers is exactly how to pay for the equipment they want to purchase," explains Fales. "A lot of the time, the sales reps will be dealing with operations managers or IT managers. From their perspective, as long as the money is in their budget, they'll buy it. Beyond that, they may not know where the money is coming from. According to Fales, it’s in the best interest of manufacturers to help their customers acquire equipment through financing.
What options can manufacturers provide? There are many, according to Fales:
• A referral program. The manufacturer may have business cards of three or four leasing companies. If the customer wants to finance the purchase, the salesperson gives these cards to the customer, and it is up to the customer to try to make the arrangements.
• A third-party vendor program. Here, the leasing company may have some reps specifically focused on the manufacturer's products. They also assist the manufacturer's sales reps in closing deals. There is no balance-sheet risk to the manufacturer.
• A "private-label" program. This is similar to a third-party vendor program; however, the leasing documents may have the manufacturer's name on them. In addition, the manufacturer doesn't assume any balance-sheet risk.
• A joint venture. Here, the leasing company and manufacturer form an equity joint venture with the sole purpose of providing financing services. Both companies can share in the profit, and they are both committed because both have equity invested. A potential downside for the manufacturer is that it may have some balance sheet risk depending on how the joint venture is structured.
• A virtual joint venture. If a manufacturer wants to do a joint venture, but doesn't want to take the risk on its balance sheet, the leasing company can set up the books and treat it as if it is a true equity joint venture. "It is a nice way to get the benefits of a joint venture, but without the time and cost associated with setting up a legal entity," explains Fales, indicating that at the end of the year, the books are reconciled, and the two companies share in the profits or losses.
• A captive financing program. This is for manufacturers that want to "jump in with both feet." Here, the manufacturer owns and runs the entire leasing business. "Manufacturers that offer this include Caterpillar, John Deere, IBM, HP, Dell, and others," states Fales. The benefits are profits. "IBM, for example, makes more than one billion dollars net after tax profit per year," he states. "Of course, if you don't run it well, you stand to lose a lot of money on credit losses."
Express options
One company offering leasing options to manufacturers and vendors is U.S. Express Leasing (USXL), which specializes in private-label leasing. The company calls itself a "small ticket" leasing specialist that partners with manufacturers, resellers, and dealers to establish flexible financing. It offers financing to partners that sell all-encompassing technologies—e.g., software, fleet management services technology, telecommunications, storage, and IT.
R.J. Grimshaw, general manager for technology finance sales for USXL, agrees with Fales on the importance of promoting financing options during the sales cycle.
"Manufacturers need to understand the importance of financing and make it part of their 'go to market' strategy," says Grimshaw. "When salespeople are presenting solutions to end users, they should discuss financing options."
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"Manufacturers need to understand the importance of financing and make it part of their 'go to market' strategy." —R.J. Grimshaw, general manager, technology finance sales, US Express Leasing |
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In fact, says Grimshaw, USXL finds that manufacturers that train their salespeople to bring up the financing option very early in the sales cycle are the ones that are the most successful with USXL's services.
One company that has successfully been using the third-party leasing option is Teletrac Inc., a maker of GPS tracking systems for fleet management applications.
“We began using leasing about 10 years ago," reports Tim Van Cleve, chief operating officer, explaining that at the time, the industry primarily utilized a "cash purchase" scenario with customers who made monthly payments. "I came here from the office products industry, where leasing was very advantageous and affordable for end users," says Van Cleve. "It provided easier entry points and not as much cash outlay."
Since adopting third-party leasing, Teletrac says about 85 percent to 90 percent of its business is done through leasing arrangements.
Today's economy
Offering financing options to customers is particularly important in today's economy.
"The current credit environment is unprecedented,” says Fales. "This will be a challenging environment for the financing industry, including manufacturer's financing. A lot of the third-party companies that provide leasing are taking a hard look at their operations. Some are electing to limit the types of assets they will finance. Some are even exiting this part of the business altogether."
This doesn't pose a problem for USXL, though, according to Grimshaw. "We don't have any legacy balance sheet issues," he explains.
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