Vendor Financing Tightens, Hitting Companies, Customers (but Wirth still open for business!)

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Vendor Financing Tightens, Hitting Companies, Customers

Vendor financing, an important source of sales financing for American businesses, is likely to become harder to tap and more expensive in the months ahead. Companies and their customers will probably be affected.

The latest indications came Thursday, when CIT Group Inc. (CIT) executives said the company was focusing on improving its vendor financing unit's profitability in part by increasing pricing and focusing on higher-margin customers. General Electric Co.'s (GE) vendor financing arm is also raising prices and becoming more selective about taking on new accounts. And motorcycle maker Harley-Davidson Inc.'s (HOG) in-house financing arm has raised the rates on its consumer loans.

It's another sign that large-scale credit problems affecting financial services firms are filtering down to Main Street, says Sameer Gokhale, an analyst at Keefe Bruyette & Woods. "This is a clear manifestation of the credit crunch's effect on ordinary businesses and their customers."

Speaking of CIT, Gokhale says, "When they're saying they can't lend as much to middle-market businesses, that has a serious impact" on companies that are directly involved with small to mid-sized firms and their customers.

CIT and GE Capital are major providers of vendor financing, which helps companies outsource their customer credit lines. A restaurant chain might offer franchisees a line of credit to help open their new eateries, or a photocopier seller might offer businesses a payment plan through a third-party financing firm like CIT and GE. CIT customers include Dunkin' Donuts and heating and air conditioning system giant Lennox International Inc. (LII); GE says it doesn't release the names of its vendor finance customers.

But these major vendor financiers also have to borrow money so that they can continue to offer such lines of credit, and that has become extremely difficult in this year's tight credit environment. The market for securitizations, in which lending lines are bundled and sold off to investors, has effectively closed; corporate bonds aren't flying off the shelves; and banks are even wary of lending to one another.

That's left vendor financing businesses facing their own problems with tough borrowing terms. At the same time, existing multi-year contracts they signed with customers pre-2008 can crimp their ability to pass on those costs, and setting prices on new accounts is difficult with market conditions shifting daily.

Vendor financing units are becoming "very conscious of who they are lending to," says Matthew Albrecht, an equity analyst at Standard & Poor's. "The end result is likely to be some degree of restrictive lending practices, just for safety's sake."

Any tightening of the vendor finance spigot means businesses ranging from large equipment manufacturers to retailers who outsource their credit lines will have a harder time offering their customers loans to buy new products. And that, in turn, will lead to fewer new sales.

"I think it would be very helpful to Main Street if the government were to allow companies like CIT, with industrial loan banks, to access to some of the liquidity provided to bank holding and financial holding companies," KBW's Gokhale said.

CIT on Thursday said it took a $455.1 million pretax goodwill and intangible- asset impairment charge in its vendor finance segment, a move triggered by diminished earnings expectations for the segment. Alexander T. Mason, president and chief operating officer at CIT, told analysts the company has re-prioritized its use of capital to make it available strictly to "strategic customers where we provide high value-added service," and that it is aiming to make the vendor finance segment "substantially" more profitable in 2009.

"Let me be clear. We are focused on risk-adjusted return on capital, and thus we are willing to forego originations if our desired pricing is not there," Mason said during the analyst call.

GE's vendor financing department is open for business and honoring its existing contracts, says Stephen White, a spokesman for GE Capital Solutions. But rates for new business have risen and the company is being careful about screening the accounts it will take on.

"Conditions dictate that we've got to be pretty selective on new businesses we'll fund until things settle down," said White on Friday.

On a broad basis, the latest data from the Equipment Leasing and Finance Association also show slowing activity. The trade group has more than 700 members; its Monthly Leasing and Finance Index, which reports economic activity for the $650 billion equipment finance sector, showed overall new business volume for August decreased 14.5% when compared to the same period in 2007. The organization's president said the decline was likely a combination of capital constraints among lessors and lenders, enhanced underwriting standards and risk- based pricing, and some slowing demand.

-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com

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 10-17-081510ET
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