As subscription and as-a-service agreements become more popular in the equipment industry, some lenders are turning to assignment financing as another profitable venture.
When an OEM, service provider or software provider agrees on a subscription or as-a-service agreement with a customer, it creates an asset that can be financed separately, Jim Teal, president and chief operating officer of vendor services for Mitsubishi HC Capital America, told Equipment Finance News.
The company tries to “make that document enforceable and assignable, and we’ll take assignment of that document,” he said. “Traditionally, what equipment finance firms have done is they’ve tried to lay their lease or loan next to that vendor’s document, and then it gets confusing because sometimes the terms can conflict.”
This is because some as-a-service contracts contain dozens of pages and separate loan contracts that also contain several pages, Teal said.
Benefits for vendors, lenders
Vendors and service providers can finance the agreements as their own assets through assignment financing, providing another profit avenue for themselves and lenders, Teal said.
“As other people start to realize they can turn this contract into cash up front instead of a monthly payment … more and more light bulbs will go off,” he said. “It’s growing every single year that people are not just outright selling their product anymore.”
For equipment on a usage contract, rental contract or as-a-service agreement, assignment financing works well, especially for renewals, Teal said.
When an equipment contract, for example, “comes to an end of a term and the customer wants to continue with it, you write them a new contract,” he said. “It’s the same piece of equipment, so you just wrote another contract, a second contract, for that piece of equipment, and it’s almost like you got paid twice. As more people hear about it and find out how it actually works, it’s just going to get more popular.”
Risk
Still, lenders and vendors should educate themselves as to whether the parties involved in the initial agreement and the assignment agreement are financially solid and worth the risk, Teal said.
“As the company that’s taking assignment, you’re now taking on the credit risk of that end user, so you’re providing all the present value of all the payments up front to the vendor, and there’s no recourse to them now,” he said.
As-a-service activity growth
North American traditional rental providers, including Ashtead Group, United Rentals, H&E Equipment Services and Herc Rentals, experienced 67.5% growth year over year in the third quarter, according to global investment bank Houlihan Lokey’s Equipment-as-a-Service (EaaS) market update, released Dec. 10. North American traditional rental is up 70.9% over the past three years.
Growth in EaaS is expected to continue, according to the report.
“The EaaS sector continues to demonstrate strength, fueled by acquisitions, refinancing activity and strategic service expansions by leading companies,” the report states. “Sustained demand from construction, infrastructure and live event sectors, coupled with effective price increases despite inflationary pressures, further supports ongoing growth.”
Several industries such as technology, health care and industrials continue to show signs of strength in terms of as-a-service financing and assignment financing, Teal said.
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