Vendor and manufacturing recourse programs are once again being aggressively developed throughout the commercial equipment finance and leasing industry. Generally, these programs are excellent tools to mitigate risk and to encourage vendor and manufacturing participation when, and if, specific transactions incur challenges. However, not all recourse programs are equal; and many recourse programs have limitations.
Typically, vendor and manufacturing recourse programs start small and over time expand beyond their initial intentions by both the finance companies and their recourse partners.
Let me share a lesson learned from early in my career. I created a recourse program with a strong, regional construction vendor that had been in business for decades. The construction industry was robust. The vendor wanted my company to approve some deals that were clearly on the credit edge. The vendor was willing to provide full recourse on these specific transactions. At first, each transaction was carefully reviewed by both the finance company and the CFO of the vendor. There were a limited number of recourse transactions each quarter. There were few challenges. The few transactions that had slow payments were repurchased by the vendor and often the vendor was able, when needed, to repossess the equipment and resell the equipment with no losses. (The industry was robust, and the recourse was easy to enforce.) Because of the success, the program was expanded within a year. More recourse was requested and provided on tougher credits. Instead of a few recourse transactions per quarter, the program expanded to multiple transactions each month. The finance company had millions of dollars of recourse with this strong vendor.
What could go wrong?
The robust construction economy turned south quickly. Both recourse and non-recourse transactions became a challenge for every collection department throughout the industry. I attended an auction within months of the downturn. There were hundreds of pieces of equipment to be auctioned and less than two dozen bidders. Equipment values dropped significantly.
I was the originator who walked into the CEO's office of my once largest vendor and informed him that his company was contractually obligated to repurchase multiple transactions, totaling millions of dollars. His sales had dropped, his profitability had vanished, and now his recourse obligation had swelled. My knee-jerk reaction leaving his office that day was that I would never encourage a vendor to provide recourse in the future. If my company, or I, was not comfortable with the credit risk, I would not transfer that risk to my partners.
The above scenario is not to suggest that there are not appropriate times to request recourse from partners. Many of these programs are excellent tools for both finance companies, vendors, manufacturers, and other partners. I want to caution those companies that are too quick to expand these programs with more leniency during robust economic times. Consider the long-term unintended consequences.
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This "Sales Tip" is provided by Wheeler Business Consulting.