Service-focused business models challenge financing

New business models, which focus on digitalisation and Equipment as a Service as one example, are generating innovative and more flexible ways for companies to do business. At the same time, this places new demands on financing.

Award ceremony

As technology presses the fast-forward button on change, the companies that succeed will be those that adapt to the new trends and financing that customers are asking for, says Nicolas Saoudi, Director, Trade Sales Nordics, Germany & Switzerland, Standard Chartered. “This is the key for corporates and banks,” he says.

Saoudi was one of several speakers at the Nordic Region Trade & Export Finance Conference, held in Stockholm, Sweden on November 13. Together with Greger Svanström, Global Director, Trade & Customer Finance, Volvo Construction Equipment (VCE), he addressed equipment as a service (EaaS) and financing the “uberisation” of heavy industry.

Alternative ways to purchase

The traditional way of selling equipment is changing for VCE due to customer demand. Today, an increasing number of customers are looking for alternative ways to purchase what they need, for example through EaaS.

With EaaS, customers no longer buy and own expensive equipment. Instead, they pay for the time they need to use the equipment. “We can help with a piece of mind approach,” says Svanström. “The customer knows they will have 95 per cent availability and pay us for 10 years. It is a fantastic and competitive advantage for us to sell hours for their digger, rather than the actual product. This means that I can take back the asset and sell it or replace it as long as I deliver the agreed performance.”

VCE’s new business model, which can be compared to leasing rather than owning cars, could become a popular alternative to traditional purchasing, as it frees up capital-intensive costs for customers while generating a long-term revenue stream for suppliers in the way of services. “The business model itself is quite traditional – we need to fulfil customer needs for financial reward – but the means of getting there is different,” Svanström explains.

Some risks for banks

Autonomous machines and the connectivity that comes with the Internet of Things (IoT), are making such business models possible. Volvo can manage its fleets remotely and receive alerts when it is time to do maintenance or have an automatic customer invoice generated at the right time. “IoT produces a lot of data that is collected with these machines,” says Saoudi. This data includes a wealth of detail about customer behaviour he adds, for example, how customers use the Volvo machines, when they buy them and why they buy them. “When we gather the data together it’s a powerful tool for banks and financing.”

Nonetheless, as Saoudi points out, there are some risks for banks when it comes to financing such contracts, for example if a customer defaults or goes bankrupt before the 10-year service contract expires. And as companies move from selling goods to selling services, there are no longer any assets as collateral. “The bank can’t repossess anything,” he says, adding: “This is changing the dynamics regarding financing.”

Saoudi believes that the opportunities, however, outweigh such challenges. “There is easier access to data as the machines are connected and we know how and when they are being used and can see a clear picture of how they are working and the services being delivered to the buyer. Digitalisation and IoT makes us more comfortable that we can finance this.” Additionally, there is growing demand from customers for this type of business model, says Saoudi. “Buyers don’t really want to own the machines but they need them and want to use them,” he says. “This will push financing parties to find solutions based on the technology changes we are seeing. We are at the beginning of that journey today.”

Financing solution for service-related products

Many companies, like Volvo, are giving their customers an option to buying expensive equipment, such as having them pay for time and service instead of the actual equipment. EKN recognises this strong trend in many industries and is helping companies including Volvo, with suitable financing arrangements.

“I’m impressed that traditional industries are coming with these business models,” says Marie Aglert, director, Large Corporates, EKN. “I think EKN and others have to work on regulations to make sure we stay relevant in this.”

“We aim to be first of the export credit agencies in the world with a really good financing solution for service-related products. Sweden is at the forefront when it comes to technical solutions and equipment. If, together with companies and banks we can also reach a financial solution, then Swedish companies will be even sharper on the international arena,” says Marie Aglert.

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