Leveraging Bank Referral Programs to Enhance Originations

by Jeff Armstrong

Jeff Armstrong is Vice President and head of Bankers Leasing Group, a division of Beacon Funding Corporation. Armstrong is a former 13-year commercial banker in the Chicagoland area and has been with Beacon Funding for more than 11 years. He holds a BA from Indiana University, Bloomington, IN and an MBA from DePaul University, Chicago, IL graduating with Distinction. He has been a frequent presenter at various banks and a panelist and speaker for organizations such as the National Equipment Finance Association (NEFA) and the Association for Corporate Growth (ACG).

Even though it may seem like working with a competitor, equipment financing companies and banks can find mutual benefits from a bank referral program.

With 78% of businesses using financing to acquire equipment according to a recent Equipment Leasing and Financing Association study, it’s more important than ever for equipment leasing companies to stay ahead of the competition and look for ways to grow originations. One way to do that is to form bank referral programs. A bank referral program can be defined as an agreement between a commercial bank and an equipment financing company to successfully refer and fund ongoing equipment transactions for the benefit of the bank, equipment leasing company and customer.

At first thought, it seems counter intuitive for banks and equipment financing companies to work together. In many ways, they can be competitors. After all, the clientele often overlaps, and they both want to grow volume with customers and build lasting and profitable client relationships. When business success hinges on customer retention in this extremely competitive banking marketplace, it can be difficult to see the value in referring customers to a completely separate organization.

Sometimes this need for profit and the inherent sense of competition can cause both parties to overlook the benefits of working together to provide a full slate of financing services to customers. Setting aside competition and expanding a company’s vision to a long-term outlook can bring the benefits into focus.

There are three sides to this story: the perspective of the banker, the equipment leasing company and that of the customer. To truly understand the benefits of working together, it’s necessary to know the complete story of how each side comes into play and how they gain from forming a referral partnership. But before diving into the benefits, let’s look at the problems that arise when partnerships aren’t formed.

Business owners looking for equipment financing often instinctively turn to banks, especially when they have worked with a particular bank in the past, personally or professionally. At times, a customer’s needs don’t fit into a bank’s business model, credit guidelines or preferred transaction size. Bankers are forced to say “no” to valued or prospective clients, something they hate to do. When this happens, customers are left without financing and are more tempted to turn to competing banks. On top of that, a declined credit application strains relationships and can even cause a customer to question a long-standing banking relationship altogether.

On the other hand, if an equipment leasing company is unwilling to pursue banker relationships or sees them purely as competition, they lose out on a substantial amount of quality clients. Either way, deals don’t get done and business is lost.

Now that the perils of avoiding bank/leasing company relationships have been discussed, it is easier to understand how each party can benefit.

The Customer

The financing process typically starts with the customer, so there’s no better place to start discussing the benefits. A business owner’s main goal is to get the best equipment financing possible by whatever means necessary. But if they have challenged credit, have just established their new business, need flexible financing options or are “tapped out” at their bank, they may have a difficult time finding funding for their equipment acquisition.

If the bank they choose has a solid relationship with an equipment financing company, they are more likely to get financing one way or another. If they are referred to an outside company by their banker, they still are able to get the equipment they require and maintain ties to their preferred banker. After all, an equipment lessor is not engaged in traditional bank services like depository, treasury management, etc. – they are strictly equipment financing experts.

Customer Benefits Snapshot

  • Flexible financing options (100% financing, skip, deferred, seasonal payments, etc.)
  • Better chance of receiving quicker funding no matter the credit profile
  • Gain access to “application-only” financing with limited or no financial reporting required
  • Conserve bank lines of credit and credit caps set by the bank
  • Retains relationship with trusted banker

The Banker

While it may seem that the banker has the least to gain from working with equipment leasing companies, there is actually a substantial list of benefits.

First is the ability to nurture customer relationships by being a full-service financial solutions provider. It isn’t uncommon for a customer to turn to a bank they have previously used when it comes time to buy equipment. They expect the process to be easier because of their banking history. A lot of times this is true, but equipment financing comes with a whole new set of parameters with which banks often don’t have experience. In addition, the bank may not be comfortable funding a particular type of equipment. On top of that, a recent ELFA study revealed that banks continue to focus their lending efforts on lower risk transactions. This leaves banks in a lurch. They don’t want to say “no” to good clients, but they also can’t break from their lending model.

By referring the opportunity to an equipment leasing company, the bank mitigates the risk. Many leasing companies are more equipped to work with challenged credit, fund smaller deals and work with start-ups. They can do all this while still keeping the banker involved. This route allows the banker to help the customer obtain financing without deploying the funds themselves and taking on the risk.

When first approaching new clients, bankers often find that businesses prefer to start with a single deal and potentially form a relationship. However, this transactional type of opportunity isn’t typically a comfort-zone for bankers. Being able to refer that initial credit request to a leasing company allows the banker to get a foot in the door and utilize leasing as a “wedge” product. Once again, the banker stays involved and can build a full banking relationship with the customer.

Last but certainly not least, is the banker’s ability to stay ahead of their direct competition. Without a leasing company to turn to, bank clients seek financing from competition. This is especially detrimental to the relationship if the new lender is a bank with an internal leasing division. This may end with the original bank losing the entire client relationship.

When banks are able to refer clients to a trusted partner, rather than being cut off from their clients, bankers stay involved in the transaction and remain the clients’ choice for future banking needs.

Banker Benefits Snapshot

  • Prevent competitors from penetrating client relationships
  • Build new client relationships without the risk (use leasing as a “wedge” product)
  • Solutions for smaller credit requests
  • Mitigate credit exposure for larger borrowers
  • Say “yes” to more clients

The Equipment Financing Company

Like bankers, lessors stand to gain from developing strong bank referral relationships. In addition to the traditional benefits of growing originations, bank partnerships add to leasing companies’ credibility and initiate lasting customer relationships. Additionally, contrary to popular belief, bank-referred clients tend to have stronger credit and lower default ratios as compared to vendor-referred business.

Developing relationships with bankers gives equipment financing companies access to potential clients that they may otherwise be unable to reach. When banks reach out, equipment financing companies do not have to do as much of the leg work. The customer is already interested in financing equipment, and the banker has most likely already discussed the process with them. Many times, the client has even already shared financial statements or other pertinent information which can easily be relayed to the lessor with the customer’s authorization. The lessor benefits from the due diligence already performed by the banker.

Having strong ties with banks also adds credibility to smaller equipment financing firms. Customers tend to trust big banks with recognizable names. Being able to highlight bank relationships shows a certain level of trustworthiness that may otherwise take years to develop.

Equipment Leasing Company Benefits Snapshot

  • Access to clients already interested in equipment financing
  • Ability to fund stronger credits versus vendor-referred business
  • Increased number of clients and transactions
  • Greater name recognition and increased credibility

The Risks

The risks involved in pursuing these types of partnerships are generally small in comparison to the benefits, but they are still worth mentioning.
Staying Relevant: After a banker refers a customer to an independent equipment financing company, there is a small chance that the banker gets left behind and misses out on relationship building. To prevent this, a firm plan should be put into place to ensure the banker is kept in the loop. Constant communication between all parties and transparent business practices keeps everyone involved and creates a mutually beneficial partnership.
Financial Risks: Bankers typically have valid reasons for turning down credit requests; it’s up to the equipment financing company to evaluate the risk and decide if the request is able to be approved. It helps if both the banker and the lessor know each other’s preferred types of business. This keeps the client from being turned down twice.

Perhaps the biggest challenge of getting bank referral relationships started is moving past the perceived rivalry between different types of lending organizations. Before any new leases can be successfully referred and funded, the perceived competition needs to be set aside. Once this is accomplished, both sides can begin to benefit from the new bank referral partnership.

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