Equipment discounters, which operate as both broker and lender, are aiming to develop lender and vendor partnerships amid a riskier macroeconomic environment.
By discounting a transaction rather than only brokering or financing it, discounters maintain a balanced level of control and risk to better support their partners, Skip Wehner, manager of education at the National Equipment Finance Association and former vice president and chief operation officer at the former independent finance company Pinnacle Capital Partners, which was acquired by commercial financier Alliance Funding Group in March 2020, said during a panel at NEFA’s spring conference in Huntington Beach, Calif., last week.
“Maybe it’s a piece of equipment for that vendor that is really marketable for like a trade-in or trade-up,” he said. “It may have been sold, but you now control that residual position and can work with that vendor to strengthen that relationship or still work with them on the trade-outs.”
Similarities to brokers
In many ways, discounters operate similarly to brokers, but with an asset portfolio that they can use to age leases, hold assets and increase earnings, Steven Geller, owner of equipment finance intermediary and management consulting firm Leasing Solutions, told Equipment Finance News.
“All these discounters generally started off as brokers, and when they built up capital or the ability to get capital, they became discounters,” he said. “What generally happens is that a discounter will book a deal, pay for it, and maybe aged for a month or two, and then sell it off, so they get an extra couple months of earnings out of that … but they were at risk for those first few months.”
Since discounters put together the initial terms of the deal, they also maintain the freedom to sell it off however they see fit — including not at all, Geller said.
“If they booked the deal, and if they don’t like the terms, they don’t have to sell it off,” he said. “They can keep it in their portfolio and in portfolio it’s tremendous earnings but by selling off portfolios or selling off pieces, they’re getting money to invest back in more business.”
Managing discounting risks
Equipment discounters balance investment and asset management risks with the potential benefits of maintaining initial control of the asset and transaction, Wehner said.
For example, if a customer reneges or wishes to alter a discounted deal while it remains on the discounter’s books, then the discounter maintains control of the process and the residuals. A broker, on the other hand, would need the lender’s involvement to manage any transaction, he said.
“It just gives you a lot more control. With that control, there’s a lot more investment and there’s risk.”
Register for the 2024 Equipment Finance Connect, which focuses on best practices in equipment finance, on May 5-7 in Nashville. Learn about the event and free dealer registration at EquipmentFinanceConnect.com.
