This formula seemed to allow for high volume and efficiency while keeping default rates at acceptable levels within a funder’s portfolio. For leasing businesses that were willing to take more risk, it was not unusual to further secure some transactions with a lien on the business owner’s personal real estate.
In the recent economic downturn, neither of these credit avenues has held up well. In fact, for some, the traditional approach used to grant credit turned out to be a recipe for disaster. As delinquency and default rates soared, portfolios were in shambles and additional collateral positions were essentially worthless. In addition, the economic slowdown exposed many large pyramid-type fraud schemes that had gone under the radar for years. A large number of leasing companies went out of business. For surviving leasing firms and banks, many were forced to slash or abandon the small-ticket leasing arena altogether.
As confidence in the economy has gradually begun to recover and delinquency rates have declined, lenders are eager to replenish their portfolios, but apparently only with “A” quality credit. This has posed extreme challenges for small and medium-sized businesses seeking financing to start, continue, or even grow their operations. Unless they have excellent credit, many traditional avenues of financing are not yet available to them. For lenders, the market for “A” credits to purchase new or replacement equipment has shrunk dramatically, resulting in a lack of volume for those trying to rebuild portfolios. Older, stronger commercial borrowers still exercise caution when it comes to purchasing new equipment or vehicles. This lack of volume is having the effect of driving rates down to extremely low levels. One could argue that while it is good for those companies that qualify, it is unrealistic “price versus risk” for lenders and probably unwise in the long run.
Where does this leave us? With patchy news on the economic front With patchy news on the economic front including continued substandard housing and unemployment numbers, things remain sluggish on the demand side for many lenders, and with a lack of home equity and other personal assets , there is still not enough credit available to the less than perfect borrower.
Today, many small and medium-sized businesses find that their bank borrowing capacity has been reduced or “maxed out” rapidly. With greatly reduced or negative home equity positions, lines of credit and credit cards are also not the financing option they once were for smaller businesses. Some have turned to private lenders, but at a high cost. The fees can be as expensive as twenty to thirty percent or more. This is often a last resort for a business and is generally not attractive.
For the independent lessor competing for volume in the small ticket space, current circumstances can provide robust and profitable business opportunities if approached practically. Things to consider in one’s business model would include the following:
Adjusting rating models with certain parameters that will require review by an actual analyst, rather than automatically downgrading, may result in additional approvals. Once the full picture is properly analyzed, the transaction may present an acceptable “risk versus reward” to the lessor.
Approaching vendors previously thought to be out of reach for smaller independents can yield unexpected positive results. Providers are now more receptive to working with more than just traditional high-volume “program” lessors. Today’s providers, also suffering from lower demand for their products, require financing for a wide range of credit-quality customers. With fewer sales, each pass or reject is more meaningful. They need lenders who find creative ways to approve more transactions. The cheapest price is not necessarily the main consideration in driving a provider’s choice of financial partner today.
The willingness to finance unconventional, but necessary, business equipment can uncover new growth opportunities with strong companies. Examples include school buses to private transportation companies, taxi medallions, and helicopters that provide up-to-date information on weather and traffic in major metropolitan areas. With a little creative thinking, there is no limit to the types of business “teams” or vehicles that can be tailored to fit a company’s parameters and credit appetite.
Increasing marketing and networking activities is also critical in this environment. While in a fight for survival mode, many leasing and financing companies have scaled back these activities. Businesses may not realize that independent landlord is still available. It is critical that the business community knows that you are actively involved in lending and seeking additional business.
A return to some prudent structuring improvements may also improve a lessor’s position in a transaction that could lead to an approval that might, on its face, have been a decline. Enhancements such as the placement of liens on paid corporate vehicles, a pledge of the cash surrender value of life insurance, or additional security deposits that will be held for a period of time can help provide that little extra that may be needed in some circumstances. .
Equipment financing today is not a business for the faint of heart, those without industry experience, or those not well educated in the art of credit analysis. The pool of competitors active in the small business loan market has dwindled significantly. However, the remaining independents will thrive in this current climate by revamping business models, reinforcing sales efforts, and redirecting business focus to new areas of opportunity that had previously been overlooked.
