Multiply Your Margins

Multiply Your Margins

Peter Austin, General Manager, Flow Business, Siemens Financial Services

Traditionally, the channel has been reticent in embracing alternative financial techniques such as asset finance and only tended to turn to a finance provider at the eleventh hour, for example when budget constraints threatened to jeopardise a sale. But over the last few years, I have witnessed a significant leap in the understanding and adoption of innovative pointof- sale finance as a way of facilitating sales and tackling pressing comms channel challenges such as margin erosion. Indeed, our recent research showed that over a third of all sales in the Information and Communication Technologies (ICT) channel are now funded using asset finance. So as awareness and take-up continue to build, what can pioneering resellers do to stay ahead of the chasing pack?

In our experience, larger resellers and distributors sometimes opt to white-label a finance house under their own brand, but the preferred option is still to work with a visible, trusted external finance provider. However, the opportunity for pioneering channel players is to establish your own point-of-sale finance facility, lending from your own balance sheet. This may sound like a quantum leap from your current setup, and it is, requiring careful consideration and the acquisition of new skills, not least underwriting and risk, administration and collections. But no venture reaps rewards without risk – and there is vast potential to develop your financial services into a new profit

centre as well as a way of supporting your core business. (It is no coincidence that many motor manufacturers make most or indeed all of their profit from the financing of vehicles rather than through direct sales.)

Of course, the key requirement to starting your own finance division is capital. Sadly there is no silver bullet to this! But lets assume that you have raised capital, and used that to finance your sales, what options do you have if your initial capital is tied up for a number of years and you want to lend more immediately? You could go back to the business – but this may not always be possible. Or you could consider approaching existing investors again, but this has a dilutive effect. This is where another component of today’s broad financial toolkit can help – block discounting. This is one of the most efficient ways of gearing up your finance business to maximise shareholder return.

So what is block discounting? Essentially, it provides a way of gaining access to a credit line that gives you instant access to an agreed fund, at an agreed discount to the value of your current finance agreements. Funds are released in advance from capital tied up in rental or loan agreements between you the reseller and your customers. Having borrowed money by block discounting on the strength of your existing contracts, this means you are able to lend more money immediately.

Let’s take an example. Let’s assume that the total return on a range of three-year finance agreements worth £100,000 is 16%. If we then assume that out of the 16% return, 2% goes towards admin and 2% for bad debt provision then the total shareholder return over the three years would be £12,000. If the services of a block discounter were used, the reseller would be advanced £80,000 immediately on the strength of the £100,000 agreement, allowing a further £80,000 of lease agreements to be written. Again, there would then be a 16% return with 2% for admin (which will actually start to decrease with economies of scale) and 2% for bad debt provision. There would also then be an additional 9% borrowing costs for the block discounter. This leaves 3% additional income from the borrowing, or £2,400 over the life of the agreements. The block discounter would then release £64,000 upon the strength of these agreements generating a return of £1,920 and so on.

So the reseller can eventually gear up at a ratio of 4 : 1 and £100,000 of capital becomes a £500,000 book, generating 16% on the first £100,000 and 3% on the remainder. This then means that the shareholder return on the initial investment once all the leases have come to an end is 28%.

I am not claiming that it is a simple step to set up your own finance business – far from it. But with margins becoming tighter and competition steadily increasing, there is no reason why innovative channel players should not seek new ways of using financial services to generate profit. Third party finance providers are at hand to support such an initiative, and block discounting is a well-established way of gearing up for growth.

 
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