Valerie L. Gerard,
Co-CEO,
The Alta Group
Jim Jackson,
Co-CEO,
The Alta Group
Jim Merrilees,
Vice Chairman,
The Alta Group
Rick Remiker,
Vice Chairman,
The Alta Group
David Wiener,
Managing Director,
The Alta Group
Editor’s Note: This article was written in October 2024, prior to the results of the U.S. presidential election and the November Fed meeting.
There was great anticipation for the Federal Reserve’s September move to lower the target range for the federal funds rate by 50 basis points. While the Fed initially indicated more rate cuts could be on the horizon, persistent concern over inflation could delay further changes in the discount rate until conditions improve. The outcome of the presidential and congressional elections will have a greater influence on overall economic confidence.
Interest rate cuts can present opportunities, such as cheaper capital and increased equipment demand, and challenges, such as increased competition, for equipment finance firms. While this first interest rate cut in four years has been hotly anticipated, it’s important to keep things in perspective. Don’t let the hype around interest rates warp the picture. Many other elements at play in today’s market stand to have a larger impact on the equipment finance industry.
This article offers ideas to help equipment finance leaders understand what may really drive the industry in the months to come, as well as advice on what to do now to be ready to hit the ground running when the economic picture becomes clearer.
Perspective is Paramount
While September’s 50-basis-point rate reduction was a move in the right direction, it doesn’t undo the inflationary effects of recent years, as both consumers and businesses are still struggling with high prices for many goods and services.
While we all want to believe that the Fed has led us to the desired “soft landing,” the jury is still out. Continued evidence of cooling inflation, a resilient labor market and relatively strong consumer spending are certainly encouraging. But where are these trends headed? The Federal Reserve Bank of New York’s recession probability calculations forecast a 57% probability of a recession in the next 12 months, as of September.[1] This prediction is tied to the fact that the yield on a three-month treasury bill is higher than the yield on a 10-year treasury bond, a condition that has existed since November 2022.
As the Fed noted in its FOMC statement in September, employment and wage growth show signs of concern. While the Labor Department’s strong September jobs report was well-received by investors, there are still concerns among economists that these results aren’t borne out by other available data. For example, wage growth since 2021 has not kept pace with the surge in prices over that same time period, hurting consumer confidence. September survey data from the Conference Board show confidence in the labor market dropped from August to September, with fewer respondents indicating that jobs were “plentiful.”
Consumer purchasing is the biggest driver of our economy, and it’s still unclear how lower rates will impact consumer sentiment. Consumer confidence dropped significantly in September,[2] marking the largest one-month decline since August 2021. This reflects growing concerns about the future of the labor market and ongoing economic uncertainty, despite lower inflation rates. Note that this dip was most pronounced among individuals aged 35 to 54 and those earning less than $50,000 annually.
On top of this, 2024 is the beginning of a three-year period economists have dubbed, “peak 65.” This year through 2027, approximately 4.1 million Americans per year are poised to turn 65, representing the largest retirement-age surge in U.S. history. This means a much larger portion of the U.S. population will be living on fixed incomes. Paired with the heightened cost of goods and services that still exists even as the rate of inflation has cooled, this will impact the buying choices retirees make.
The latest addition to the economic impact list was delivered by Mother Nature when Hurricane Milton barreled across the Florida peninsula in early October. Coming on the heels of Hurricane Helene, which killed at least 230 people across six Southeastern states and caused catastrophic damage to communities in Western North Carolina, Milton lashed at the already-battered west coast of Florida while spreading destruction all the way to the Atlantic side of the state. How does this impact the economic picture?
Data from past hurricanes, such as Andrew and Wilma, tell us that, after the initial devastating economic impact, these communities see significant investment in infrastructure modernization, housing and commercial development from the post-storm reconstruction effort. As an example, the post-Andrew construction surge laid the foundation for long-term economic growth, particularly in Miami-Dade County, where Andrew’s devastation gave way to new commercial developments and a rebounded housing market.
In the equipment finance industry, data tell a mixed story. The September MLFI-25 index from the Equipment Leasing and Finance Association (ELFA) showed new business volume was down 10% year-over-year in August, and receivables over 30 days and charge-offs were both down slightly. The Equipment Leasing & Finance Foundation’s Monthly Confidence Index for October was 61.9, steady with September and up from 58.4 in August. While these two metrics don’t appear to be in alignment. What they do suggest is that many equipment finance firms are in a wait-and-see mode, with too many variables — including recession potential, the election outcome and geopolitical events — in a state of extreme uncertainty. Because the MLFI-25 leans heavily on bank respondents, its results may not tell the story of how captives and independents have stepped up their business volumes amid the bank pullback from equipment finance that followed the spring 2023 failures of Silicon Valley Bank and others.
What Role Will Banks Play?
This year, the industry witnessed dramatic shifts, as many banks reduced their equipment finance exposure, while captives and independents grew market share, a trend that was evident in the 2024 Monitor 100 rankings. Well-funded independents have capitalized on this, adding high-quality clients that banks abandoned in their quest to focus on deposits. Private equity firms are also playing a greater role. We are starting to see some banks step back into the space, but cautiously. Further, captives — with the overarching mission to support parent manufacturer sales — have also filled the void of recent bank retrenchment.
Where do we go from here? If bank liquidity concerns continue to ease and banks again seek loan growth, will they re-emphasize the equipment finance market? This will take time to play out, but a recent Equipment Leasing & Finance Foundation research study does shed some light on the pressures and opportunities that both banks and independents are currently experiencing.
Don’t dismiss banks across the board. While 25 of the 46 banks that completed the ELFA Survey of Equipment Finance Activity questionnaire reported a decline in year-over-year new business volume, there were 21 banks that reported volume growth. While banks, as a category, reported a 3.5% decline in overall new business volume within the 2024 Monitor 100, 21 of the 52 banks in the Monitor 100 actually reported an average increase of 12.8%.
Watch Washington
Interest rates haven’t been the only “wait-and-see” issue causing companies to delay capital outlays in recent months. The outcome of the 2024 elections has had a similar dampening effect on investment. With the outcome unknown at the time this article was written, it’s clear that election results would impact many issues that are central to the work of equipment finance firms, including:
M&A Could Go Either Way
The onset of falling rates won’t necessarily open the floodgates of mergers and acquisitions activity. There’s no doubt that lower rates can create more opportunities for buyers and may lead to higher valuations for sellers. A lot will depend on the economic picture that emerges in the coming weeks and months. If rate cuts are perceived as a response to poor underlying economic conditions, would-be buyers will back away and wait for more certainty in the marketplace, thus putting a damper on M&A activity. Also, don’t forget that the leadup to the September rate cuts was long and public, meaning the market had already priced in these cuts, so they had already factored into strategic decisions.
Political and economic uncertainty will continue to dampen M&A activity. Buyers will be reluctant to pay premiums for companies, only to find out, after the acquisition, that the rules are changing with respect to the corporate tax rate or the regulatory environment. Until these unknows become clearer, investors interested in the space will likely view financing de novo start up platforms backed by experienced leadership teams as a safer alternative.
What Equipment Finance Leaders Should Do Now
Don’t lower your defenses. Preserve your margins. Now is not the time to go on a hiring spree. Keep your funding sources close because funding availability could change. Consider diversifying your types and sources of capital. An excellent reference for best practices in funding is the Equipment Leasing and Finance Foundation research study The Alta Group authored in 2022, entitled, An excellent reference for best practices in funding is the Equipment Leasing and Finance Foundation research study The Alta Group authored in 2022, entitled, “Equipment Finance Funding, Securitization and Syndication.” Stay on top of your portfolio. Talk frequently with your customers. Provide good service. Try to eliminate the incentive they have to refinance. The larger-ticket market could see an increase in buyouts and early terminations as the incentive to refinance increases.
Optimize the customer experience. For those equipment finance firms that have not focused on core operational processes in recent years, now is a good time to reevaluate the customer journey. Dig deep into metrics — such as how quickly a borrower receives a funding commitment, how long customer service takes to resolve issues, how quickly documentation is completed — and ask how you can innovate, or how long-term investments in technology could put the business in a stronger position when growth returns.
Serve the demand for digital. It’s essential to be thinking strategically about your organization’s “digital experience,” or how digital tools could transform customer interactions, services and internal processes. This involves enhancing how customers engage online, improving service efficiency and leveraging data-driven insights to offer a seamless and personalized experience. Explore and seek out user-friendly digital platforms that can enable clients to apply for financing, manage their accounts and track lease or loan status across mobile, self-service and real-time channels aimed at enhancing user convenience. As competition intensifies and customers demand more intuitive digital experiences, equipment finance firms that prioritize digital transformation will be better positioned to grow and maintain a competitive edge.
Think practically about AI and automation. Leading firms are investing in the real work of taking AI from hype to practical reality. Set aside bandwidth to explore potential use cases within your business. How can AI help you go beyond mere automation of routine tasks like document submissions and credit checks, and help identify new ways to enhance the efficiency of the customer financing journey? Combined with Internet of Things devices, AI offers the possibility to offer value-added services, such as predictive maintenance.
Return to fixed rates. Many equipment financers in recent years adopted “float-to-fix” rates that moved upward as interest rates adjusted. Now is a good time to be reintroducing a fixed-rate product.
Lean into competitive intelligence. Consider enlisting the help of a third party to help assess your competition, identify who is struggling and go after opportunities to capture increased market share.
Keep Watching Other Fundamentals
Interest rates are just one piece of a larger puzzle. Companies in the equipment finance industry should keep an eye on other underlying fundamentals of the economy, as well as the policy outlook, to get the full picture of what’s ahead. Opportunity is on the horizon, and those who can nimbly adjust their strategies and focus on technology-driven innovation, operational efficiency, customer service and identifying growth potential will be ready to pounce when capital expenditures ramp up.
[1] “Probability of US Recession Predicted by Treasury Spread,” New York Federal Reserve, Nov. 4, 2024.
[2] Cox, Jeff, “Consumer Confidence Fell More Than Expected This Month,” NBC News, Sept. 24, 2024.
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