Vendor Financing Gets a New Lease

Daniel C. McCarthy

Vendor financing was among the many casualties when the telecommunications market went bust last year. The practice, in which a company lends its customers the funds to buy company equipment, shouldered the blame for many of the recent financial troubles endured by Lucent Technologies and Nortel Networks. Some analysts argue that vendor financing is a sly method of inflating revenue numbers, and that loans often go to just-formed start-up companies and unreliable creditors.

In the computer industry, vendor financing is a respected and comparatively venerable practice, as illustrated by IBM Global Financing. And it arguably has helped fuel several successful network build-outs in the telecom market. Its travails in that segment are perhaps explained by larger credit risks distributed among fewer customers.

However, although the networking industry may not return vendor financing to the heady pace it enjoyed three to four years ago, the practice retains some of its appeal in a sluggish market, said John Dexheimer, president of Lightwave Advisors Inc. in Westport, Conn.

"If you're having a hard time selling equipment to a cash-paying customer, vendor financing is a valid way to jump-start the market," he said. "It's a risk, but it's a valid risk."

This risk helps to explain why vendor financing has reappeared, this time in the optoelectronics manufacturing segment.

In fact, jump-starting the market is the rationale given by Bruce Hueners, vice president of marketing for Palomar Technologies, for his company's recently introduced financial services program. Based in Vista, Calif., and privately owned by CitiCorp Venture Capital in New York City, Palomar sells manufacturing stations that cost from $100,000 to $500,000 for single units and upward of $1 million for complete systems.

"We're trying to make it easier for our customers to buy from us," said Hueners. "Much of this is born out of the state of the economy. Capital funding is not as readily available as it was in 2000."

The company has leased equipment in the past on a case-by-case basis through external leasing companies such as GE Capital and Copelco. However, it partnered with a separate bank -- not CitiCorp -- to provide its financial services. Palomar's lending standards are similar to a bank's, Hueners said, but, because it is an equipment manufacturer, the company can more readily take back leased equipment and find another buyer.

If Palomar's venture indicates the beginnings of a trend among its competitors, it seems at least to have learned the lessons of other telecom suppliers. Ownership of leased equipment resides with the lease holder, so Palomar can take the equipment back if the customer defaults, Hueners said. "Once the transfer title and the equipment is accepted, then we count it as revenue."