In the best of times, customer financing can be a tempting means of generating sales. In the worst, the practice can produce little but pain.
That’s not only because of the leverage customer financing usually requires, since debt is so unwelcome during times of distress, but also because it exposes companies to the creditworthiness of their customers.
Some suggest these risks can be managed easily enough through the use of securitization and derivatives. But the cost of such arrangements is likely to rise (as is true of any form of insurance when it is most necessary), even as their efficacy is called into question, as our special report on banking, “Anxiety’s Price,” shows.
The message to those who have little choice but to finance customers in this environment is: Proceed with caution. After all, even the acknowledged master of customer finance, General Electric, finds its business model challenged as a result of its exposure. And companies that have found the sailing smoother, such as farm-equipment manufacturer John Deere (see this month’s cover story, “What Goes Around“), do so only because they learned the lessons of prudence before those lessons became painful.