Rosanne Wilson Owner & President, 1st Independent Leasing

Heather von Bargen President Caladesi Capital

Brian Bjella President, Grandview Financial

Jack Harvey Founder, President & CEO, Enterprise Financial Solutions

Rick Wilbur Founder & Managing Partner, Charter Capital

In last year’s Monitor Broker Roundtable, our participants were in the middle of a shaky industry brought on by an economic downturn that affected just about every industry and every financial sector. But as bad as it was, all kept their focus and plowed through the rough year that was 2009, ready to embrace what the downturn left in its wake, all the while keeping their sense of humor intact.

While one of the participants in this year’s roundtable likens being a broker lately to getting a root canal without anesthetic and another as going to the proctologist — and that’s the best part of your day — humor aside, the broker industry has had its fair share of shakeups in recent years and the effect has been hard to swallow.

Rosanne Wilson, owner and president of 1st Independent Leasing, says that the environment right now for brokers is “very tough,” noting there are “fewer fundings, fewer qualified applicants and fewer commissions. I’m working harder on every deal to get it placed and working longer hours to develop qualified vendors and customers.”

“It’s like starting all over again,” says Heather von Bargen, president of Caladesi Capital. “Lenders have changed their credit requirements and buying habits so when I look at a deal, it’s harder to know where to send it. It’s also frustrating to see so many declines due to the deterioration of personal credit of current lessees and prospects. This is not an industry for the faint-hearted.”

Grandview Financial’s president, Brian Bjella, has also been feeling the strain. “The challenges we are facing are not just inherent to broker/lessors… The modus operandi is survival via expense and head count reduction to ride out the storm,” he says. “Uncertainty looms as there is no clear timetable or vision of what it will look like coming out the other side. This fosters short-term transactional thinking … with little thought to unintended future consequences or long-term planning.”

Others however, note that although the industry has been strained, those relationships that have been cultivated over time have lasted through the downturn. “I am fortunate to have existing customer, vendor and banking relationships,” admits Jack Harvey, founder, president and CEO of Enterprise Financial Solutions, and immediate past president of the NAELB. “There are fewer lease funding sources, fewer decisions being made, but there are transactions there to be done and I feel that I am more valuable to my customers in this environment.”

Charter Capital’s founder and managing partner, Rick Wilbur, notes that while business is good, he, like the other participants, finds obtaining good funding is a major issue. “Because of our business model, we have plenty of business. And we’ve had plenty of business throughout most of the downturn. It’s the funding of it, which is the challenge… We anticipated a downturn [but] had no idea it was going to be so deep and so long. So we’re hurting, we’re scrambling… But it’s a very different world, it’s a much scarier world than it was two years ago.”

Non-Traditional Funders Play Bigger Role
With so many funding sources retreating and others scaling back on their broker businesses — what are the alternatives available for financing — especially in this economy? The answer varies, but all participants concede that looking at newer and non-traditional funding sources has become a valuable component to getting deals done.

So far, von Bargen says she is grateful to have only lost ancillary funding partnerships. However, she adds, “I am cautious and have gotten to know funders that have been around a long time, but I’ve not had occasion to use. I’ve also used services of some packagers who have access to funders I don’t.”

Harvey notes that he feels fortunate that the relationships Enterprise Financial Solutions has with its commercial banks are still in place, albeit with a more cautious attitude to funding. While Wilson has turned to super brokers to close deals even with higher rates and fewer commissions, she has also sought out regional banks and her local community bank in order to finance regional deals.

Wilbur has also been investigating local banking sources to fill the gap of previous funding sources. “We’ve gone to independent lessors, we’ve gone to unconventional kinds of funding sources, we’ve communicated with virtually every community bank in our geographical area of influence, and we’ve come up with some very good relationships.” He notes that at Charter Capital, “we began focusing on the vendors, the lenders that are buying our business and trying to determine what it is that appeals to them… Rather than finding people to buy what we have to sell, we have to find out what the survivors are buying and go get that business.”

Bjella says that Grandview Financial’s approach has been “battling every day and keeping a positive attitude.” He adds, “We have to focus on our company’s value proposition, servicing our core vendors and sourcing new opportunities to survive and then thrive.” He continues, “The traditional broker/funding source model has changed significantly and, in our opinion, will never resort back to its prior form. This is not to say the broker is extinct, but rather we must evolve and determine where we fit. The question we must ask ourselves is: How do we provide value and differentiate ourselves to the market, to our potential customers and to our funding partners?”

Bjella notes that today, the funders have the leverage — a difference from just a few years ago. “Overall their service levels and execution are hampered by heightened policy adherence and change. How we worked together and what worked in the past does not apply today. Accepting this fact and becoming more proactive in becoming a better customer/partner under the new rules is imperative,” he says. Among other things, Bjella says, his company has turned to local banks in order to build the balance sheet while servicing vendors.

Standing Out From the Crowd
In order to draw the attention of potential new funding sources — especially when there’s fewer to be found — the participants have turned to other means in order to seal the deal. Bjella notes that while there isn’t much his company can do differently to “justify our existence and past performance,” Grandview takes time to communicate its focus to potential lenders. “…We have developed a ‘book’ on our company that explains our structure, management and niche industries including past performance and ratios. Upon review by a potential funding partner, we can quickly ascertain the probability of a good fit with minimal time and effort.”

“We’re polishing our product,” Wilbur states. “We really understand that we’re spending more time analyzing commercial transactions, we’re spending more time researching app-only transactions — we’re making them a more appealing product, and that seems to be working.” As far as funding sources asking for more in terms of documentation, Wilbur admits, “Their credit criteria has changed but the quality of the financial information or the amount of financial information I think is still the same. It’s how they are analyzing it.”

For Harvey, “The lease application package from my perspective has changed from less is okay to the more the better. I have primarily always been a full financial package broker and lessor. The app-only business has become app-plus questions and plus more information in most cases. In light of the times, I believe it is prudent to get as much information as possible for the funders. Documentation of the lease is more complete.”

Wilson and von Bargen are also seeing a rise in what’s being requested from funding sources. Wilson notes, “I am trying to prepare better ‘write-ups’ on my deals and include much more information to help my funders understand the transaction better. I am performing more due diligence on each deal and providing them with supporting proof. On the deals that require full financials, I am finding some of my funders are asking for CPA reviewed or audited financials instead of compiled. Most small businesses don’t have reviewed or audited statements.”

Caladesi’s von Bargen adds that she’s been requesting much more in terms of financials as well. “The age of easy corporate-only borrowing is gone. If I see a deal without personal credit, unless it’s publicly held, I request financials, regardless of size. I’m getting financial statements on many more deals than previously… We also see more site-inspections on more deals.”

As Things Start to Settle, Challenges Still Loom
The last two years have been full of various challenges for the economy, the country, the global marketplace and for the broker industry. With so many obstacles, it’s hard to focus on just a few but our participants discuss the biggest trials they have been facing as well those that plague the industry now and in the near future. The individual challenges these companies are facing come back to the basics — as most industries in these times tend to do. “My challenge is to continue to cultivate my banking relationships,” says Harvey, “and hope they do not get into any issues not related to my business.”

Wilson looks to the other end of the spectrum, noting that finding qualified customers is her company’s biggest problem of late. “We can’t waste our time on deals that will not get funded under the new criteria. I am starting to market to some UCC leads I recently purchased on customers I know will qualify. And I am calling on vendors that sell the types of equipment that are desirable to my funders.”

Von Bargen sees both sides of the coin as being hard to handle — with her most challenging aspect being finding approvable deals. Noting an oft-used phase, she describes what’s happening to both funders and end-users that’s making it even harder to be the person in the middle. “It’s the ‘perfect storm’ of credit requirements tightening while personal credits decline. I celebrate each approval I get these days. To find approvable deals, I focus my efforts on targeting more business from my current lessees. That’s no guarantee these days but it’s a good place to start.”

Grandview’s biggest obstacle is being able to execute successfully and increase the company’s market share within its defined niches. “Our history demonstrates our abilities to develop and grow a profitable small-ticket lease portfolio. How we fund and who we partner with will be the key to our execution. We believe the non-recourse model alone … is limiting and does not build long-term sustainable value. Implementing a balance sheet build strategy, via equity and/or debt, will be crucial to our long-term success. Our company is very bullish on the near-term opportunities, in the equipment leasing industry. The companies with a strategic long-term vision, disciplined execution and a strong capital position will reap the rewards.”

Cash management is what Wilbur calls a vital component for his company, but is quick to add that he feels that finding financing at “reasonable commercial rates,” is going to be hard for just about all companies, brokers and end-users alike, especially if they climbed out of the recent recession in one piece, but with small bruises nonetheless. Wilbur says he fears the lack of understanding that there will be for those seeking funding. “The lending community will have a kind of remote view of the marketplace and their answer to that will be a simple solution: Let’s only lease to companies with better credit, and there are going to be very, very few of those around… That’s what my fear is.”

As for the broker industry as a whole, Harvey notes that to recover it has to look to what it has always done in times of stress and turmoil. “The successful players understand what their customers’ needs are, they understand their financial sources’ capabilities … and maintain a high degree of integrity with all of the above. There is a strong need for leasing and finance in the world today. One has to work harder and smarter than ever before.”

Wilson and Bjella look at the banks, lessors and other funders as the main challenge for the industry, and both say that access to capital will be the most critical piece in bringing the industry back on track and as Wilson puts it, so they are “able to keep their doors open.”

Bjella notes that finding capital will remain a “considerable hurdle. The large bank-owned leasing companies and handful of independents enabled with a strong capital supply are in the minority. They also are in the best position to quickly capitalize on the pending opportunities created from the revival of our economy and pent up demand.” He adds, “It appears that trends in portfolio delinquencies and losses have stabilized to manageable levels within the equipment leasing sector.”

Von Bargen claims that yet another challenge will be some of the unethical behavior that mars the landscape. She notes the ramifications of the “advanced fee-collecting, pre-approval sending leasing companies that solicit deposits from would-be lessees nationwide,” is indeed a problem that must be faced. She adds, “This kind of unethical behavior will get the rest of us hardworking leasing companies over-regulated. It’s disingenuous to say a deposit is ‘necessary’ to take the deal off the street. In many cases, especially now, that’s simply not the case.”

The lack of integrity within the industry is also a sore spot for Wilbur. “Unless the lending community really understands that their principal goal should be quality and not quantity, then I think the industry is going to suffer for a long time,” he says. “I can’t see people investing into it. Integrity and professionalism, I think, are absolutely essential and it just doesn’t seem to carry any weight any more.”

For his part, he notes his company stays away from questionable deals. “I’d rather walk away from a deal as hard as that might be than to deal with companies like that. And I think the lending community should do the same… I think the lenders have to really take a good, hard look at themselves and practice what they preach.” And what they preach is that they only want to deal with the best brokers, Wilbur says, but are really only concerned with those that generate volume. “That’s not an indictment of every single lender… That’s driven by corporate requirements to come up certain investment levels or benchmarks and they’ve got so much money to invest … and this guy’s producing $1 million a month so we’ll fund him. It doesn’t matter what he tells his customers, and that in turn gives our entire industry a bad name.”