A recourse agreement between equipment dealer or reseller and an equipment financing company can that little extra something required to get an approval for financing in situations where an approval would not otherwise be forthcoming.
In basic terms, a recourse agreement provides the equipment financing company some comfort or recourse to protect themselves from loss in the event of borrower or lessee default. In the manner we are describing, the agreed to recourse is being provided by the equipment dealer or reseller.
Especially for larger ticket items where credit can be tight, a form of recourse can be an effective way for an equipment seller to move more product into the market.
If done properly, recourse agreements can benefit lender, dealer, and borrower.
From the borrower’s or lessee’s point of view, a recourse agreement is going to allow them to acquire the asset they seek. If the benefit of acquisition is significant enough to the borrower or lessee, they may even be prepared to pay a premium for the asset.
For the equipment financing company, recourse agreements are all about reducing their risk against loss while still allowing them to be in a position to add loans or leases to their portfolio which makes them money.
The dealer has the potential to benefit from a recourse agreement in a number of different ways.
As already mentioned above, the buyer may be prepared to pay a premium or at least a non discounted price in order to be able to take advantage of a recourse offer to a lender. This can result in higher average margins to the dealer or equipment reseller.
The dealer can also close more sales which will lead to additional profits as well.
The third potential benefit to an equipment dealer is that a properly structured recourse agreement can provide access to used equipment at or below market price that can be added into inventory and resold.
To provide a better picture of what we’re talking about, lets go through a simple example of recourse where by the dealer agrees to repurchase the asset from the borrower or financing company in the event of default, at 50% of the original purchase price.
In order for this to be acceptable to a lender or leasing company, they are likely going to want to see a substantial down payment by the buyer, perhaps in the 15% to 25% range.
With the dealer recourse added into the down payment, the financing company’s risk is greatly reduced. If the offered financing terms is no more than three years, the risk of loss is very low.
If the dealer is confident that the equipment’s market value will be at least 50% or higher at the end of the financing term, the risk of loss to the dealer is low as well.
Assuming the assessment for providing recourse is adequate, then the risk of loss per loan or lease where recourse can be applied should be low and offset by all the profit margin collectively earned from the incremental sales that occurred because recourse was offered to the equipment financing company.
For more information on recourse agreements and how they can be used to increase customer sales, give us a call and we’ll get all your questions answered right away.