A properly funded and supported customer financing entity owned by a manufacturer (“captive”) may enable the manufacturer parent to increase market share and create shareholder value in an economic recession by taking business from competitors lacking a captive capability, says Steve Robinson, a Principal with The Alta Group.
The Alta Group is a niche international consultancy of multi-skilled asset finance professionals with extensive hands-on experience running leasing companies and in all aspects of leasing.
A growing number of manufacturers in many industry sectors have established captive finance companies to support their sales efforts. At the heart of a captive's value add are knowledge of the parent's business, strategy and market. There are several extremely successful and long-established active captives, but very few have experienced a recession on anything like the scale that is currently challenging the industry.
The credit crunch has seen much reduced availability of funding at all levels of the global economy, but in particular in the SME sector. Inter-bank funding lines are in short supply as banks seek to reduce their exposure to one another, but they must lend to generate income and are much more likely to lend to a stable manufacturer to fund a captive than to another financial institution.
Captives are traditionally funded by either their parent company or third-party finance companies on a full or partial recourse basis. As liquidity dries up, the availability of that funding reduces and prices increase, and some captives may begin to feel vulnerable and question their role and value to the parent.
Robinson says that whilst there is no doubt that a captive's value will, and should, be reviewed by the parent as it seeks to maximise the return generated by its available funds, there is a strong argument supporting the hypothesis that a captive's role is even more important in a recession than in a buoyant economy.
The most basic activity of a captive is to support the sales efforts of the parent by providing funding to customers. However, Robinson says that there are many more weapons in its armoury, such as enhanced customer relationship management leading to customer intimacy, brand enhancement, increasing sales of services or other value-added products via bundled offerings and, not unimportantly, incremental profit through the financing streams.
Whilst a manufacturer might not regard its captive as a core business and may, therefore, be reluctant to use its limited cash resources to fund the captive, an indisputable certainty for every manufacturer is that selling its products is the core activity.
Therefore, the role of a captive as a sales enabler and provider of funding to the customer takes on even greater importance in times of limited market liquidity – if the manufacturer's target customers do not have cash or available credit lines then they will not be able to purchase the manufacturer's products.
Consequently, ensuring that the captive has access to adequate funding is of major importance for the manufacturer. Whilst this may necessitate it gearing up to fund the captive, there is no doubt that the funding will be critical in helping to close sales and in driving the core business.
In the current market conditions, facilitating the availability of funding to customers is a critical element in the sales process giving manufacturers with a captive arm the potential for a competitive edge. This is a significant strategic tool for seizing opportunities out of adversity, Robinson stresses.