Vendor Finance for the Uninitiated: A Newcomer’s Guide to Building a Vendor Finance Business

A profitable equipment leasing and finance business is a hot commodity today. Banks are snatching up independent companies, portfolios and origination platforms and paying top dollar for the privilege of owning a strong book of earning assets, or a team that is capable of building one. The recent announcement of Huntington Bancshares’ Equipment Finance platform acquiring Macquarie Equipment Finance is one example of an unsightly bludgeoned winner raising an arm in victory at the end of a nasty street fight; they may have won the battle but they paid a hefty premium—which will require significant cost cuts, efficiency improvements and measurable asset growth to justify the price tag.

In recent months several companies have jumped into the equipment finance business with gusto. In early March, Stonebriar Commercial Finance announced the commencement of its operations to begin “providing a multitude of financing products to companies throughout the credit spectrum, ” according to their press release. In January, Fortress Investment Group announced their intent to buy MicroFinancial. Late last year, Byline Bank acquired Baytree Financial, Crestmark Bank picked up TIP Capital and First Midwest Bank bought National Machine Tool Finance. Others – including National Bank Holdings, BBVA Compass and Synovus Bank—each launched new equipment finance business units within the last 12 months.

Only two recent acquisitions appear to have any real focus on vendor finance: CIT’s purchase of Direct Capital and Umpqua Bank’s buyout of Financial Pacific Leasing. The following list of guidelines was compiled through conversations with vendor finance experts in San Francisco, Minneapolis, Chicago, Danbury, Charlotte and Jacksonville. While the participants shall remain nameless, the goal of this list is to help others who may be considering an exploratory adventure down the lucrative vendor finance path.

  1. Know the real customer

Successful lessors who participate in the vendor finance marketplace share one absolute truism: the vendor partner is the customer. Formal vendor finance programs require contractual commitments between a seller and a funding source. The seller is the customer even though the seller’s customer – the buyer – is the eventual revenue generator. Often referred to as a customer financing program, vendor programs are really seller financing programs. Those who don’t ‘get it’ will never be successful in this space.

  1. Yours, mine and ours

Buyers – the end user customers responsible for the financial obligations undertaken through a lease or a loan – remain the property of the vendor. Responsibility for servicing the billing and collection activities for these end users throughout the course of the contract can be conducted by you or me, in your name, my name or our names, jointly. However, these customers belong to you—my vendor partner—which means that I will never encroach on that relationship by trying to cross-sell other products or services without your direct involvement.

  1. Start with the end in mind

Strong and lasting vendor relationships are the long term goal. Do not make decisions based on short term objectives. Both strategic and tactical decisions are made with consideration for how the outcome may impact the overall relationship. A solid partnership between a vendor and a funding source is never finished; it is an evolving body of work that transforms over time as needs, market conditions and competition change. Program agreements are amended and revised accordingly. A well designed relationship ages, matures, gains experience and endures. Create your programs with the belief that they will last forever.

  1. Communication is critical

If I decline a credit request for a strategic client of my vendor partner and it costs them the relationship – we’re going to have a problem. Instead, my vendor partner comes to me with an explanation that the client is strategically important to the business and may require kid gloves. If my vendor partner discontinues a product for which I am making significant residual investments – we’re going to have a problem. Instead, we share product life cycles, including upgrade paths and next generation replacements. Whether it is invoice dates, interim rent, end of term options, documentation fees or some other mundane detail – be forthcoming and over communicate. It will only strengthen your relationship.

  1. Dialogue: Open, honest, cross-functional and frequent

Communication is crucial in developing strong vendor finance relationships. Whether it be pricing, turnaround times or credit parameters—let there be no surprises. Establish service level agreements that are regularly monitored and reported. Encourage functional areas from both sides of the partnership to build relationships with their counterparts. Avoid the pains of a disaster that sneaks up on you. Build an escalation model that can quickly address important issues with senior decision makers. Don’t let sore spots fester. Get them out in the open, air them out and let them heal.

  1. No partnership is equal—it’s about balanced risk and reward

Vendor finance programs can take on many different forms ranging from informal referral programs to complex joint ventures and everything in between. What was once an area made up of exclusive relationships between a vendor and a funding source has evolved into what is commonly referred to as the multi-funder model. The larger the vendor the more sources they may have. Today’s largest vendors—more commonly the captive finance organizations beneath the vendors—have become the most demanding partners. But the push-pull relationship must be balanced. If I bring the lowest cost funding for your most creditworthy customers you cannot expect me to take on excess credit risk. If you ask me to lower my price you should also be adding value by offering me additional funding opportunities or credit support. To be successful there must be balanced give and take.

  1. No one always comes out on top

Partner is often a loosely used word. It is rare to see vendor finance joint ventures or partnerships succeed because the goals of the partners are often diametrically opposed. While the vendor wants to sell more stuff by approving more customers, to do so, the funding source may have to take on undue risk. Recourse, loss pools and other creative structures can help overcome or mitigate the risk, albeit, without proper compensation from the vendor partner to the funder, this model cannot survive. If there is a winner, there is also a loser. Aim for win win.

  1. Give a little, get a little

Today’s heavily regulated banking environment leaves little wiggle room for bank funding partners to accommodate special requests or make concessions when petitioned by their vendor partner. Realistically, this can be viewed as a deficiency when vendors compare bank funding partners to the capabilities available through independent non-bank funding sources. Sure, the banks have the advantage on price, but oftentimes it’s flexibility that is more important to the vendor. To sustain vital long term partnerships, vendors and their funding source need to find ways to work through the challenges of the regulatory environment and find ways to help each other meet their respective business objectives. Policy, regulatory oversight or some other silly reason may dictate why a funding source cannot comply with a request made by their vendor partner. Get creative. Find other ways to show your support. Act like a real partner.

  1. No strings attached … except for the prenuptial

Face it – divorce happens, partnerships dissolve and vendor programs go away. Divorce can be nasty. Who gets the kids? Who pays the tuition, mortgage and life insurance? A prenuptial agreement can answer these questions. So can a well-crafted vendor program agreement. Don’t risk the loss of income or jeopardize your firm’s reputation by publicly fighting over what happens to the portfolio and customers when an ugly termination, or even a friendly separation, occurs. Spell out the details with buyout provisions and net present value calculations. Vendors like to have the string they can pull to bring their customers back home. Smart funding sources can agree to such strings but with their eyes wide open—no surprises. Be precautious. Get it in writing to avoid the fighting.

  1. It’s not brain surgery or rocket science

Vendor finance takes a bit of business aptitude and a lot of common sense. Treat others as they want to be treated. Be fair but diligent. Don’t overpromise and under deliver. Consider the impact on the overall relationship every time you make a critical decision. Understand the importance of timing and deadlines. Help your partner achieve their business objectives. Add value to the relationship. Communicate, communicate, and communicate. Heck, I could be writing about any business, not simply vendor finance. That’s why it’s really not that complicated.


Dexter Van Dango provides a step by step to follow to take advantage of the long term benefits and annuities of a well-run vendor finance platform.

Do you have a different opinion or would you like to share a different approach? I would be delighted to hear from you. Contact me at

Dexter Van Dango is a pen name for a real person who is a senior executive with more than 25 years of experience in the equipment leasing industry. A self-described portly, middle-aged, graying, balding leasing guy in the twilight of a mediocre career, Van Dango will provide occasional insight from the front lines via Monitor.

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