We come across this every now and then in our discussions with vendor partners and prospects. Purely looking at the headline figures, self-funding your equipment sales looks appealing.
As a vendor, you can access credit at your overdraft rate from your business bank, add a little additional margin to the overdraft rate for your added administration and risk and provide the deal to your customer at a monthly payment. Better yet, if your business is in a healthy cashflow position and you have access to liquid capital, you can cut out your bank credit and fund directly from your cash reserves.
On the surface, it looks like everybody wins!
When you delve a little deeper though, there are some key potential pitfalls that you as a vendor need to consider before self-funding your equipment sales.
Potential pitfalls to consider before funding your equipment sales:
Your banks added exposure
Theoretically, banks have a calculated threshold for each customer that they are willing to lend to that customer at any one time.
If you utilise your overdraft to fund these payment solutions to your customers, consider the impact this has on your banks future credit assessments. As you have essentially increased the amount they have provided to you as credit, this may have a negative impact on any future requests you make for credit for your business, as it has increased your credit balance towards that threshold.
Your additional credit risk
Funders rates to the market all contain a level of risk margin. To many, the headline number often looks like an appealing amount of interest being earned by the funder, but the level of risk associated with the lend must be considered too.
For a funder who has a large portfolio, there is always a level of acceptable ‘bad debt’ across the portfolio. All funders have varying appetites for the level that they deem acceptable, as this is part of their overall lending strategy when they consider who they will lend to and for what.
In short, bad debt is inevitable. If you are self-funding and your portfolio is small, consider the impact that a deal going bad will have on your business’s finances. Before you tell yourself that you are an astute judge of ‘good credit’ -which we don’t doubt-, remember that there have been many examples in history of businesses that were experiencing enviable success that suddenly suffer an environmental change that sees them enter administration.
There are many steps to a finance transaction between initial quoting and final settlement. Have you considered the amount of administration that is involved and who will complete this within your organisation? Who will complete the documentation? Will you be running credit checks? What will the process be where you require additional supporting information to establish a level of comfort with the applicant’s credit position? Who will liaise with the applicant throughout this process? Who will check all documentation? What documentation will you use and do you have the legal resources to ensure that documentation is up to date with current legislation and regulatory requirements?
The additional costs of billing and collecting on a periodic basis
If you are self-funding your equipment sales, you will also need appropriate systems and people to perform the bill and collect process for the life of the agreement once it settles. There is also the potential for financial reporting requirements and the requirement to stay up to date with the ever-changing asset finance legislative environment. What would this cost your business?
For those vendors that may be reading this saying “but I already bill and collect on agreements I have with a third-party finance partner”, then perhaps the bigger question is why are you doing your finance partners work? Billing and collecting is just one of the many functions that should be completed by any good finance partner as part of their partner program offering.
The lost opportunity cost
Disregarding the likelihood of exposure and credit risk concerns, there is no getting away from the lost opportunity cost of using your capital or overdraft to self-fund your equipment sales.
Consider what you could do for your business with the capital or overdraft balances that you don’t use to self-fund your equipment sales. There could be countless opportunities to grow your business, improve efficiencies, invest in productivity improvement software & systems, hire additional income generating resources or even purchase income generating equipment that will far outweigh the financial benefit of funding your sales in the long run.
Special Note for IT Resellers or Managed Service Providers
Self-funding of the hardware sales is all too common in your industry. Many consider the relatively lower cost of hardware versus your contracted monthly managed service revenue an opportunity to bundle it in, requiring you to pay your distributor or manufacturer yourself up front for the hardware purchase, recouping your payment and margin over the next 12, 24 or 36 months of the Managed Service agreement. All the above credit, exposure and opportunity cost topics are very relevant to you in this situation, no matter how small the asset value.
Is it right for you?
Headline rates and comparisons are only the half of it. Make sure you consider all the factors when deciding whether self-funding your equipment sales is right for your business.
If after reading this, you have decided that you’re better off speaking to an asset finance specialist to establish a partner program, then we look forward to speaking to you and you can contact any of our experienced team to discuss your requirements and establish your payment solution partner program with us.
If after reading this you are still confident that self-funding is the right approach for your business, then great. We would still appreciate the opportunity to speak to you about our services for your billing and collecting of your monthly payments. Take the uncertainty out of that cost to your business.
We offer this as a service utilising our industry best practice systems and processes along with our experienced specialist team to offer you and your customers a great customer experience. Again, contact any of our team to discuss this further.