Earlier this year, the Equipment Leasing & Finance Association (ELFA) included the increasing use of non-standard financing agreements on its list of the Top Ten Acquisition Trends for 2016. Perhaps more importantly, in a recent survey more than 50 percent of ELFA members involved in vendor finance programs named non-standard finance agreements as either the number one or the number two most important issue facing their business.

Although non-standard financing is an important business strategy for today’s equipment finance companies, there remains a significant amount of uncertainty around the model that requires lessors to offer bundled services and payment variability that can include everything from usage-based payment plans to early cancellation.

And contrary to popular belief, customers across all industry segments, not just information technology and cloud solutions, are looking for this kind of flexibility in their financing solutions. Companies in transportation, health care, energy, information technology, construction, office equipment and other markets are selecting partners and solutions based on who can provide the greatest flexibility, and all signs point to this being the “new normal” when it comes to choosing and financing business solutions.

How does a business – and an entire industry – make the transition from financing products to helping companies obtain intangible assets and services that are increasingly part of today’s equipment acquisitions?

Customer Motivations

The first thing to consider is that customer demand is driving the increasing popularity of managed services offerings. To be competitive in today’s market, businesses of all types, including both equipment finance companies and their customers, must be focused on outcomes and solutions rather than equipment. Across the board, equipment finance customers are demanding more flexibility, increased scalability, the ability to terminate an agreement if needed, and more convenience overall from vendors and partners.

Although financing agreements that enable companies to bundle the complete cost of a technology solution, including equipment, services and software and training have been around for a long time, we’re seeing increased interest in these and other “full service” financing packages. In fact in many cases, today’s customers are demonstrating a preference toward a consumption model, where companies just pay for what they use rather than owning the assets themselves.

Several factors will contribute to the continued growth and acceleration of non-standard financing. As the pace of business continues to accelerate, outsourcing models continue to grow in both acceptance and maturity and remote monitoring technologies become more sophisticated, it’s likely that the availability and demand for managed services offerings will also increase. Equipment finance companies will need to find a way to meet these evolving needs in order to remain competitive.

Making the Shift to a Service Model

Non-standard financing is more than just a new product or service offering. Traditional finance companies that plan to offer non-standard financing must undergo a cultural shift that includes moving away from the mindset of product financing to a “consumption” or solutions-based model. This means consulting more closely with customers to identify their needs and pulling together a complete team to address concerns related to risk, legal and accounting issues.

The cultural shift needed to truly provide managed services financing solutions has implications that impact most functional teams within an equipment finance organization. This can include:

• Sales – Managed services agreements typically mean increased complexity and multiple customer decision makers on one deal.
• Credit – The implementation of essential use underwriting and new ways of evaluating service providers, manufacturers and customers is an important component of managing risk in non-standard financing agreements.
• Billing and Customer Service – Managed services agreements require finance companies to offer more flexible billing options and also introduces the need to manage cash/payments on behalf of other parties.
• Documentation – Non-standard finance agreements typically require multiple party contracts, often with financing integrated into a services contract.
• Asset Management – Non-standard financing agreements introduce the need for essential use evaluation, the ability to value equipment in a “flex” environment, and in some cases the remarketing of displaced or competing technologies.
• Legal – Working with multiple parties increases the complexity of contracts and their enforceability, and legal departments must also be able to isolate credit from performance risk in managed services agreements.
• IT/Systems – In many cases, non-standard financing agreements require the implementation of flexible billing options, asset and usage tracking, and new ways of accounting for and funding payments to multiple parties.

The cultural transformation from a product financing company to one that provides managed services agreements will have a substantial impact on the equipment finance organization as a whole and must be driven by the leadership team. The first step is for the leadership team to commit to this new model, and then get up to speed on what the different roles in the organization need to do differently in order to deliver this new model to customers.

Continued on Page 2...