The commercial equipment leasing and finance industry is currently experiencing a sense of euphoria. Expectations are by mid-2021 the concerns of Covid-19 will start to recede, and business will boom. Business is already strong and industry participants are anticipating additional growth throughout 2021. The industry is flush with investment dollars. Banks and investors want to significantly increase their commercial equipment assets. Banks are not optimistic about the potential growth in commercial real estate (retail strip malls, or office buildings); therefore, they are depending upon businesses releasing their pent-up demand for capital equipment to fuel opportunities to employ bank funding. The influx of capital into the industry is placing additional stress on competition and margins. The better-than-expected performance of commercial equipment finance and leasing assets throughout the pandemic is inviting new dollars into the industry and placing additional pressure on credit departments to loosen requirements and open the flood gates to more transactions. Initially, it appears to be a sales department's "dream come true" - higher demand for equipment, lower yields, and lower credit criteria all converging at the same time. A perfect celebration!
However, there is more to the story. The industry has been here before and there are many lessons learned from past experiences. Below are just a few:
Participating in the race to the bottom with the lowest yields and lowest credit criteria never ends well. Competing against "dumb money" and irrational decision-making is short lived. Make your decisions based upon the long game.
Just because business increases substantially does not mean you are the guru of the industry or have the best sales team. You just happen to be at the right place at the right time. Enjoy the ride but be humble - it will not last forever.
Value over price should always remain a top priority. Long-term relationships are built on value and trust.
The equipment matters. Your equipment knowledge will be critical to long-term sustainability when the euphoria ends. Now is not the time to venture too far from your core expertise.
Cutting corners on documentation and best practices is always a threat when operations are extremely busy with processing double or triple the business. Low rates and low credit criteria are harmful. Cutting operational corners is devastating.
Enjoy the short-term ride, but plan and act for the long run.
For originators: Now is the time to work longer and harder than ever. Competition will be fierce. However, when business is this strong, "Don't leave the hole while the fish are still biting." Now is the time to show vendors and end-users that you are more than an order taker. You are a professional, a financial advisor, and a long-term player.
Industry veterans, who have experienced spikes in the past, offer a simple plan. Capture more than your fair share of business through hard work. Stick to the basics of the business and never forget that the commercial equipment finance is a risk/reward proposition. There are always risks, and the main objectives are to mitigate risk and be paid properly for the risk incurred.
Wheeler Business Consulting works with banks, independents, captives, origination companies, and investors in the equipment leasing and finance arena. We provide training, strategic planning, and acquisition services. Scott Wheeler is available to discuss your long-term strategy, to assist your staff to maximize outcomes, and to better position your organization in the market.
