Since the 2008 economic downturn, the financial markets have been adopting and redefining themselves to better serve the needs of small and medium-size businesses. One of the greatest opportunities which continue to grow is the need for strong participants in the commercial equipment leasing and finance industry. I recently completed a grant study for the Equipment Leasing and Finance Foundation entitled: Community Banks and Equipment Finance - What it Takes to Be a Success. The study identified attributes which must be present for a community bank to enter or expand its presence in the equipment funding arena. However, these attributes are relevant for any organization exploring the possibility of participating in the equipment finance market…especially banks, investors, manufacturers and captive equipment companies.
Although equipment funding is steadily improving (as is indicated by the MLFI-25 monthly activity reports published by the Equipment Leasing and Finance Association), there remains considerable pent-up demand for new commercial equipment. Much of the activity realized over the past 18-24 months has been the pure replacement of worn-out equipment. At some point, businesses will accelerate their equipment acquisitions primarily to gain competitive efficiencies and to prepare for future growth.
Banks and captive equipment companies can capture the market opportunity by properly establishing or expanding into the commercial equipment funding arena. Creating a successful equipment funding subsidiary requires a strong commitment by the parent company. The leasing/financing operation needs to integrate into and support the overall strategy and vision of the parent company. Successful banks, captive participants and investors must incorporate the funding capabilities of their equipment operations into the primary mission of the parent company.
It takes true leadership from inception to properly build an equipment funding operation. The creation of a successful equipment funding subsidiary is a process, and a strong, well-established foundation is essential to building a sustainable business model that will enhance the entire strategy of the company. This article will explore the resources and expertise needed to successfully develop an equipment leasing/financing subsidiary.
Internal Resources
Organizations considering equipment funding need to consider internal resources and facilitate a thorough evaluation of existing internal expertise. Not unlike establishing any new venture, natural synergies and complementary objectives must exist, which are shared by the existing operation and the newly considered funding subsidiary. The upfront evaluation should confirm the buy-in of top management to support and promote the equipment funding activity.
Every organization has multiple strengths and weaknesses. A well-executed equipment funding subsidiary should enhance an organization’s strengths and mitigate its weaknesses. The internal resources should be tapped upfront to strategize how the current internal expertise can be utilized to enhance the value proposition of the funding subsidiary. The existing internal expertise should be a determining factor in establishing competitive advantage for the commercial equipment funding subsidiary; however, the advantage needs to be proactively created, communicated and used to build a successful funding subsidiary.
Examples of existing internal expertise can include the following: customer penetration, territorial knowledge, credit underwriting skills, equipment expertise, collection expertise, systems expertise, established marketing platforms and strong managerial skills.
One of the prevailing attributes which was confirmed in our study was that organizations properly integrating expertise throughout an organization are best able to create sustainable success. For example, funding commercial equipment is not without financial risk. The parent company needs to utilize its existing financial staff along with the leadership of the funding subsidiary to determine the company’s benchmark of acceptable financial risk, and preemptively create credit standards which are acceptable and embraced by the entire executive team.
Too often, credit standards are corporately considered after a subsidiary is fully operational. Also, disagreements among management and divisions, with competing interest, fuel ongoing segregation of the equipment subsidiary from the parent company – a recipe for failure. Whereas, when a proper market-driven credit policy is established, embraced and adhered to, then the entire executive team is able to embrace credit success and is equally able to confront credit performance challenges in unison.
Subsidiary Leadership
Strong leadership is essential in the establishment of a commercial equipment leasing/financing subsidiary. The interviewing process of the study included many questions, from community banks interested in establishing equipment funding subsidiaries, regarding the process of finding the “right” leadership. For all equipment funding subsidiaries, the correct leader needs verifiable expertise in all aspects of managing an equipment operation (sales, marketing, credit, legal, collections, etc.).
However, equally as important is the ability of the subsidiary head to work within the internal culture of the parent company. The leadership must build a team of sales and operations staff able to effectively work with multiple external resources, internal resources and intra-company resources. The leadership position requires an individual who can manage multiple stakeholders on different levels and effectively manage production results which align with the subsidiary’s goals and the parent company’s strategy.
The leadership should manage the cross-selling efforts of the subsidiary by providing educational activities throughout the organization. Therefore, the leader is required to possess the skills sets necessary for presenting concepts in the board room and for addressing the front-line employees. Several successful subsidiary leaders interviewed in the study commented that they spend considerable effort and time managing up the executive hierarchy; however, they consider their time spent educating front-line personnel as most crucial in determining the success of the subsidiary and its position within the organization.
It is well worth the time and effort to correctly identify the personal attributes needed to fill this position. Subsidiary leaders are required to wear many hats and to manage many complex relationships. Identifying, hiring and retaining the “right” leader is determined equally by the culture of the parent company and by the expertise and experiences of the candidate. Interviews with industry recruiters indicated that there is tremendous talent available in the market and much of the hiring process is related to the specific experience a candidate has in working within a similar organization (i.e., experience in a bank-owned leasing company, experience in a captive environment).
Outsourcing
As previously outlined, the creation of an equipment-funding subsidiary needs to utilize internal resources when appropriate. However, there is no need to overburden an existing platform with processes and activities that do not naturally fit within the current capabilities of the organization. Almost all activities can be inexpensively outsourced to strong business partners. The temptation to ineffectively internalize or diminish key functions of an equipment financing/leasing operation can cause severe challenges in the future for a subsidiary.
The initial evaluation of creating an equipment funding subsidiary should include which functions can be best performed through third-party service providers, and what is the expectation for these services to remain external or to be internalized in the future. There are many critical functions which can be best addressed through external resources.
The most common outsourced activities are operational activities and systems. However, it is not unusual for newly created equipment financing/leasing subsidiaries to incorporate indirect sales and marketing activities as a means to originate new business, especially during the inception stage. Outsourcing of activities can utilize external resources and expertise at an incremental cost and allows companies to best serve their commercial clients.
Concluding Thoughts
The successful creation of an equipment funding subsidiary is often dependent on the initial intention, commitment and the establishment of a strong foundation that is well integrated into the fabric of the parent company. And, a successful equipment financing/leasing subsidiary will enhance the value which an organization offers to its customers, stockholders and other stakeholders. The funding subsidiary should provide services that allow a parent company to leverage its brand identity.
Therefore, it is important for a bank, captive equipment company or an investor to consider internal and external resources which are available to build a subsidiary that properly aligns with the vision of the parent company. There are growing opportunities for banks, captives and investors to enter and expand into the equipment arena. The long-term outlook is strong, and with the proper planning and execution an equipment funding subsidiary will create "real" value for the parent company.
A copy of the research study: Community Banks and Equipment Finance – What it Takes to Be a Success can be ordered through the Equipment Leasing and Finance Foundation at http://www.leasefoundation.org