Brian Bjella President, Grandview Financial

Barry Reitman President, Keystone Equipment Leasing

Heather von Bargen President, Caladesi Capital

Rick Wilbur Founder & Managing Partner, Charter Capital

Olevia Yates Managing Member, Navigant Equipment Leasing & Finance

But like last year, our brokers are facing reality head on, aware of the problems but trying to battle through them as best they can. As they do, they stay determined to continue on their course. A lot has changed in a year — and in that time, many companies, and the way they have done business, have changed as well. For equipment leasing brokers, this has meant not only trying to find alternative sources of funding but also looking at their own business plans and tweaking them as necessary to survive the current economic struggle.

Big Changes… Not for the Better
Brian Bjella, president of Grandview Financial, recognized the softness of the market in the last quarter of 2007, and says the company’s performance was still acceptable until May 2008, “Overall, our company witnessed a slight increase in applications from 2008 versus 2007. We struggled with a combination of lower approval ratios, lower closing ratios and a reduction in our average ticket size,” he says. These factors resulted in a 20% decrease in fundings year over year.

“Q4 [2008] was extremely challenging and probably indicative of the environment we will live in for the next 12 months,” he adds. “It seems we are in a vicious cycle of a slowdown in capital expenditures that will not correct itself unless the credit markets start expanding. Right, wrong or indifferent, we have definitely employed a survival strategy, which leans toward making decisions for the short term and potentially compromising long-term growth.”

Keystone Equipment Leasing President Barry Reitman notes that this has been a year to remember — no question. “The big impacts have been the convergence of generally weaker credits and generally tighter credit windows,” he says. “On the brighter side, this convergence has impacted the entire industry, so tighter margins are typically not required to close sales. The better customers are pleased to be offered reasonable finance programs, and don’t beat us up as much as has been the case at some periods in the past.”

“Our business has definitely changed — it’s down,” notes Caladesi Capital president Heather von Bargen. “In some respects, we have less competition given that so many players have exited the market. However, our vendors tell us that people are simply not buying right now.”

Rick Wilbur, founder and managing partner of Charter Capital, has also been feeling the pain of fewer funders actually funding anymore and hints at some frustration. “I’m very, very disappointed with some of our more significant lenders… We’ve always believed that if we provided a real quality product and maintained a high integrity, that if there ever was an economic hiccup, those characteristics would distinguish us from other brokers — and some of our lenders have said as much,” he explains. “I recognize this environment is an aberration. But I think the lenders have just had a knee-jerk reaction, they’re treating everybody the same… It seems like whether you’re a good guy or a bad guy, you’re treated the same now… I think the lending community is in shock.”

Economy Affects More Than Just Portfolios
In many respects, the current crisis, which has affected just about every business in every industry, has changed the way many brokers are now doing their business — whether it’s in the way they find new prospects and funders or how they manage their own day-to-day operations.

Olevia Yates, managing member, of Navigant Equipment Leasing & Finance, left her former job at a “super broker” to start her own leasing company. “The businesses I call on are different from what I was doing before. I am now able to focus my attention and efforts on the businesses that I choose,” she says. “I am finding it beneficial to have direct contact with all parties to my transactions. I believe that will be particularly important in tough economic times.”

Wilbur, meanwhile, has become more focused on expenses and income. “We’ve adopted a kind of bunker mentality — we’ve reduced some expenses, we’ve minimized our outflow of cash wherever we can.” His advice for other brokers is to look at what money is spent on, where a company is making money and concentrating on the core business. “I think you have to be committed to surviving rather than growing… Unfortunately, that changes everyday because I think the market is very volatile and it’s unpredictable.”

Bjella has also seen the strain within his own doors and, as a result, has had to tighten spending and close the company’s East Coast office. In his 16 years in the business both at a large bank leasing company and as an entrepreneur, two things were always consistent: “I have always grown my business unit year over year, and I have never had to let people go due to budgetary constraints. Welcome to the real world.”

Caladesi Capital, von Bargen says, is heavily marketing to its existing lessee database and, so far, has had success getting deals from these sources. However, nothing these days is easy. “While we close some of them, others are no longer approvable. It can be difficult for a repeat client to understand why they are declined after we have a deal on the books,” she states.

Show Me the Money
Over the past year, many funding sources have left the market or dropped their broker programs all together, which has affected many of our participants’ ability to get the job done even for long-term customers. But being creative and looking at nontraditional funders has helped them through this rough patch where they’re looking for cash that’s nowhere to be found.

Reitman admits to being one of the lucky ones whose funders are still in the game. To maintain that he says, “All we have to do is protect our funding sources. Full disclosure, overkill of due diligence before submitting a deal and double checking bank and other references are absolutely critical.”

Yates explains that maintaining close relationships with funders has helped to close deals while not wasting anyone’s time, “especially in this environment where funding sources need to more closely watch their costs.” She advises that brokers watch ratios, and make application packages easy to put through the system in order to keep the broker-funder relationship flowing smoothly.

For von Bargen the keys are “flexibility, networking and knowing your funders. Our core funders are still taking quality broker business from quality brokers. I’m more concerned about partnering with a funder whose own funding capabilities disappear. We partner with long-term stable companies, but in today’s environment, that can change overnight. We’re doing more due diligence on our funders and would rather walk from a deal than get caught in a situation where funding is withheld.”

However she adds that she’s not afraid to look in other areas. “Should any of our funders exit the marketplace, I’m hoping there are some renegade private investors out there looking to make money with responsible good-paying leases rather than lose it in the market. Until then, I’m keeping the lines of communication open with the funders we rely on.”

For now, Wilbur is looking for what lenders will actually buy more than ever before, and “we’re trying to get a better definition of that… [Lenders] live in a cocoon, and they’re very accustomed to dealing with brokers rather than with the end-users. They’re isolated from the real world so they react to things in a vacuum… It’s really reassessing and reestablishing what the lenders’ parameters are right now and focusing on what you can get funded.”

In order to fund deals during this time, Wilbur says he is going back and looking at old relationships that had gone dormant, to see if there’s a chance of resurrection. “We’re looking for private money as well… What you have to do is remove all the limitations that we perceive exist and seek funds wherever you can from insurance companies, from community banks and from credit unions… It’s a process. We have done that all year, every year. So we’ve kind of greased the wheel a little bit.”

Grandview’s Bjella also agrees that it’s time to look outside traditional sources to close deals in this climate as the company’s list of funders is contracting. “During the good times, indirect origination is viewed as a quick and easy strategy to boost portfolio assets,” he explains. “Unfortunately, most companies that employ this strategy are not fully committed to the market or lack the capital resources and business practices to successfully compete long term. Funders are coping with near historic highs in delinquency and losses with limited liquidity and capital resources. Thus, they have to prioritize and make tough business decisions based on those parameters, often the easiest decision is to exit the indirect business.”

As a result, he adds, he is leaning even more on his long-standing funders, and he has opened communications with other sources both large and small. He advises other brokers to do the same. “Look outside the equipment leasing industry, have discussions with local banks, insurance firms and wealthy investors. There is money on the sideline, especially in today’s environment, looking for attractive returns.”

Searching for the Perfect Fit
As our brokers look to tried and true or entirely new sources to fund their prospects, there are key ingredients they look for in a perfect match. For Wilbur, he wants a lender that is both reliable and predictable as well as more pragmatic as they had been in the past. “I want a lender that is smarter than I am. And a lender who can recognize what our value proposition is,” he notes. “We try very hard to do things the right way and it costs us money to do that… I want a lender who recognizes that and really puts value on that, and who treats me as a partner because I treat them as a partner in the very, very true sense of the word.”

Reitman is looking for consistency and staying power noting that buy-rate is less of a factor this year within reason. Yates wants a funder with stability, one that will focus on a good relationship as well as with dedication to the broker industry.

Von Bargen looks for funders with money, saying, “We cannot send a deal in for funding and have it not be there.” For Bjella, he finds that demonstrated commitment, ethics, stability and a defined value proposition have been constant factors his company looks for in a funder. “More than anything now we are looking for a source this is willing to roll up their sleeves and sit down and discuss our business. We are more than prepared to discuss niche indices, credit profiles and portfolio performance… This is hardly a basis for a strong relationship that promotes communication, education and a strong desire to help one another succeed. There are very few funding sources today that have the ability or are even willing to implement a broker-centric model.”

Meeting the Challenges Head On
Besides the current challenges hurting all industries, the broker industry also has other hardships it has to focus on and try to combat everyday and every year. Von Bargen cites a challenge that has plagued brokers for the past couple years and will continue to do so as the crisis digs in over the next year. “Our biggest challenge is to bring new business in the door. I think this industry has become fragmented to the point that this is no single big challenge.”

For Reitman, time is of the essence; he says an issue he faces is that many small business owners “find it extremely difficult to consider changes. But this is exactly the time to give serious consideration to the basics, such as what expenses can be reduced. Re-examine things like the cost-effectiveness of those marketing materials and premiums we buy out of habit… Staying positive is good, but temper it with a realistic evaluation of your budget.”

Bjella notes that a main objective is to focus on the opportunities that present themselves. “We must properly position our offering with the funders and the vendors to earn the partnerships. As an industry, we have conditioned the expectations of OEMs and equipment vendors, unfortunately all the rules have changed. With most funders internally focused on portfolio management, this becomes a challenging process for everyone involved, but if successful with reap great rewards.”

Wilbur notes that he is fearful of the next two years. “I’m not sure that the pendulum hasn’t swung so far and so fast to the conservative side of things that it hasn’t broken the clock… When the dust settles and when business gets back to whatever the new normal is, my fear is that the lenders will still be in a state of shock and they will be looking for credits that still have a perfect credit record and a perfect history of profitable operations. I think that the companies that survive are going to all have credit problems and they’re going to all have bad years… I don’t think very many companies will qualify for credit unless banks and lenders adopt a different mentality, unless they change their formula of lending and unless they look at these situations individually like we used to.

“Lenders need to become more practical,” he continues. “They have to stop funding to companies that employ deceptive marketing practices… Lenders need to become guardians of just doing business properly and not reward those companies that are deceptive and screw their customers. I think the lending community must take into consideration what general business will look like when we come out of this economic downturn… If they do that, I think it’s a more intelligent way of looking at business — I think it’s a real world, it’s a ‘today’ way of looking at business rather than creating a formula and measuring everybody by the same yard stick.”

But it’s not just the funders that need to change their focus and attitudes, it’s also the consumer. And Yates notes that one of the biggest challenges she sees is getting consumer confidence back on track and getting them to make more capital acquisitions. For brokers to aid in doing this she adds, “Be proactive. Have a defined marketing plan and goals down on paper… Don’t wait for customers to call you. Be a partner and add value. Show your customers that you appreciate them.”

Keeping it Real and Positive Under the Circumstances
All in all, Yates says, brokers have to be creative and think outside the box. “Figure out what you can do to help your customers meet their needs. Be there to help your funding sources when they need you — and think about the long term and establish good relationships,” she says.

According to von Bargen, the current environment gives brokers an opportunity to “leverage their variety of funding sources and have multiple options for their clients. I’m hearing from many vendors that their sole funding source all of the sudden left the market and it’s put them in a rather large quandary. With a broker, one funder goes down, we have others — we protect vendors and end-users better.” She adds that, “We’re communicating to our vendors that we’re still here, we have access to funds and we’re getting approvals. We’re cutting our costs to give us a little breathing room. The hardest races are won in the worst environments.”

Over his career, Bjella notes he has witnessed few economic roller coasters, especially after September 11. “That period of time is a minor abrasion to what the banks and funding sources are facing today… Now I face the obstacle of survival as an entrepreneur in arguably the worse economic environment since the Depression… To counter, I constantly remind myself of the previous 15 years and how fortunate I have been. Thus we strive to move forward knowing that reasonableness will prevail, the markets will correct once again and more prosperous times will return.”

Wilbur concurs. “I think these are very difficult times. I think the industry is going to cull out very significantly on both sides … and I don’t think it’s a bad thing. It’s very, very painful for everybody but ultimately, it’s like pruning a tree.”