The study issued by the Equipment Leasing and Finance Foundation was entitled, “Community Banks and Equipment Finance — What it Takes to be a Success,” however, the principles, opportunities and challenges included in the study apply to any company, group or individuals that may be candidates to enter or expand into the equipment funding arena.

The commercial equipment leasing and finance industry is widely misunderstood. The statistics, especially related to bank-owned equipment assets, reflect a strong and growing opportunity for investors, banks and lessors that properly fund and manage commercial equipment portfolios. Throughout the study, and in subsequent meetings with community banking executives, I was constantly challenged to further explain the industry, dispel long-held misperceptions of high risk associated with equipment financing/leasing and to elaborate on the growing opportunities that exist in the market.

The equipment leasing and finance industry is not for every bank, manufacturer or investing group. The industry is not without risk. However, for the right organization, which is able to properly integrate equipment funding into their long-term strategy and vision, and has the capacity to properly match its financial risk tolerance with appropriate market-driven yield requirements, the opportunities are dynamic and growing.

The industry has much to applaud and celebrate as the economy continues to recover and pent-up demand for commercial equipment continues to improve. The industry was not immune to the financial crisis of 2008 and many in the industry were not able to survive the period. However, most of the current participants have weathered the storm as poor performing assets have worked themselves through the system and new assets funded since the downturn are performing exceptionally well.

Leasing assets and C&I assets currently held by all banks are outperforming all other assets held by banks (these assets have historically been top performing assets for banks). As of the third-quarter 2011, per the FDIC statistics, the delinquency rate for lease receivables and C&I assets held by banks nationwide was 0.97% and 1.8%, respectively. The charge-off rate for lease receivables and C&I assets held by banks nationwide was 0.2% and 0.73%, respectively. In comparison, as of the third quarter of 2011, the delinquency rate of all bank assets was 5.66% and a charge-off rate of all bank assets was 1.56%.

Major industry surveys of portfolios performance, new business development and improved credit submittals all indicate positive trends. Therefore, strong equipment funding professionals and corporate participants need to flaunt their expertise and knowledge when approaching business groups, banks, investors and funding partners. There is a growing opportunity for strong brokers, lessors, banks and investors to work together in cooperation to originate and fund the “right” credit transactions.

The playing field is changing, and as with any post economic downturn, there will be many new organizations entering the equipment funding arena. It is the responsibility of the existing talent to help the new entrants properly assimilate into the industry. New participants need and deserve assurance that they can participate in the positive trends without undue risk. Many veteran industry leaders, with exceptional talent and expertise to offer, are being recruited to lead new organizations. New organizations will be seeking industry partners to help them navigate the waters of commercial equipment funding.

Equipment leasing professionals are encouraged to bridge the gap between equipment funding and traditional community bank lending (which is overwhelmingly secured by real estate) by sharing information, customers and product development. These same solutions can be incorporated by brokers or lessors looking for new funding partners, by lessors developing warehouse lines and equipment finance/leasing companies attracting new investors. Superficial antidotes will not suffice. New participants want and deserve actual facts concerning which key factors contribute to success over time and what lessons were learned during the recent downturn. There is no doubt that some industries and equipment fared better than others. However, sustainability is realized through leadership and expertise regarding origination, credit policies and portfolio management.

New entrants need forward thinking strategies that are based upon secure assets, diverse portfolios and consistent results. In the example of the community banking environment, there are many different levels of participation that can be explored. With the proper partners, community banks and other investors can enter the equipment funding arena on many different levels and build strong portfolios, which can significantly contribute to bottom line results.

The need for strong automation and systems was once a daunting task for new participants into the commercial equipment leasing industry. However, the costs for controls and systems have been greatly reduced over the past decade and should no longer create barriers to entry. There are many strong service providers that are able to accommodate accurate reports and accounting functions for every situation. Community banks, as with other investors, are conducive to outsourcing multiple operational functions and are able to establish equipment funding divisions/subsidiaries with the right service partners.

Brokers, lessors and intermediaries in the industry, which are seeking relationships with banks, investors and other funding sources, should be equally represented by strong internal systems and automation. The accurate tracking of results and continuous oversight of procedures is essential in building relationships in the industry. The advancements in automation over the past decade can provide the needed confidence and security for all potential new participants to consider entering the equipment arena.

Industry advocacy starts at the grassroots level with strong professionals sharing their expertise and knowledge with potential individuals, organizations and corporate entities that can benefit from being part of a highly dynamic and growing industry. The commercial equipment leasing/finance industry is marketing-oriented and filled with the entrepreneurial spirit. Many outside of the equipment industry have different corporate cultures, especially traditional community bankers. However, the study identified several means to bridge the gaps and to integrate cultures, products and strategies among equipment leasing/finance operations and community banks.

Through an interviewing process with successful community banks, which are currently involved in the equipment funding arena, it was suggested that success is derived when differences are confronted, minimized and eliminated. Strong partnerships are created through commonalities and joint efforts to best serve the needs of corporate clients. Professionals in the industry, who want to collaborate with new partners, banks and investors, must go through an investigative process of understanding their partner and to distinguish the means by which strong equipment assets will enhance the partner’s overall strategy to reach its corporate vision.

Industry advocacy starts at the grassroots level with strong professionals sharing their expertise and knowledge with potential individuals, organizations and corporate entities that can benefit from being part of a highly dynamic and growing industry.

The potential for existing participants to embrace community banks and other investors is growing. Many smaller participants are finding new funding avenues through their efforts to embrace, educate and partner with community banks and others investors. Lessors and current bank leasing operations are creating products to collaborate with new entries and share operational platforms, funding capabilities and origination of new transactions. The equipment leasing/finance industry is an innovative business community. The industry is redefining its landscape through cooperation between veteran participants and others that have identified the growing potential in equipment funding.

Get the Full Study
A copy of the research study: “Community Banks and Equipment Finance — What it Takes to Be a Success” can be ordered through the Equipment Leasing and Finance Foundation at http://www.leasefoundation.org/

Scott A. Wheeler is president of Wheeler Business Consulting LLC, based in Fallston, MD. The practice offers consultative services in the equipment financing and leasing industry, based on Wheeler’s more than 30 years of experience in the industry, leading executive teams, credit departments, sales departments and industry task forces. For 18 of those years, he was employed in management and executive positions within bank-owned equipment financing and leasing divisions and subsidiaries. Wheeler has held board positions in the Eastern Association of Equipment Lessors, National Equipment Finance Association and Certified Leasing Professional Foundation, and he speaks on topics related to commercial equipment financing and leasing. A certified leasing professional, he holds a B.S. in economics from McDaniel College, Westminster, MD, and an executive M.B.A. from Loyola University in Baltimore.