The Future of the Equipment Finance Business

by Michael J. Fleming November/December 2008

A candy man can’t make his wares without ingredients. In the same way, a lender in the equipment finance business can’t close deals without its own form of “sugar.” The industry can’t go sugar-free, and the ingredients must be tested and measured against best practices, then packaged for its end-users’ varied tastes, because the competition will be tougher than ever.

The equipment finance business, like the confectionary business, has a good future — even a great future. There are five reasons:

  • Companies need to acquire mission critical assets to be productive, and they need financing to do this.
  • Increasingly, companies want to conserve cash, and finance on the most effective terms possible. The penetration rate for external equipment finance into the total of capital spending will increase.
  • Manufacturers and distributors will accelerate the use of financing to assist sales, and it will be integrated with the product as a feature.
  • Because the equipment finance business is first and foremost an origination business, it is led by marketers who are good at seeking differentiation and specialization. These savvy marketers are capable of positioning equipment finance as delivering special value.
  • The treasury function in SMEs, the actual raising of capital at a good price and under reasonable terms, will be harder. Finance companies will become, in some respects, a capital raising outsource for operating enterprises.

But back to the confectioner, The Candy Man. Confectioners have a future. People like a variety of sweets to meet their many different tastes. No one company really controls the market, although some large, well-known companies are leaders. The distribution systems are varied, price points range from premium to commodity, and value ranges from real to what is perceived. There are always the risks of regulation driven by ingredients and nutrition.

But whether it’s from Godiva, Mars, Nestle or the local store — whether it’s a chocolate bar, cotton candy, jelly beans or Hershey Kiss, candy needs sugar or a good synthetic substitute. No sugar or sugar substitute, no candy. No candy, no industry.

For the foreseeable future, three to four years, the equipment finance business, in all of its forms, needs sugar. The business will be driven by the availability and cost of capital. The bottom line — there will be an equipment finance industry and it will grow. But companies will need their “sugar to make their candy.”

So for the equipment finance business, the capital markets will shape new winners and losers by determining who has power in the marketplace. The macro effects will be shrinkage of capital creation because of deleveraging, regulation, capital requirements (Basel II and other regulations), transparency and the virtual implosion of capital expanding vehicles such as CDS, CDO, SPV and others. So, less sugar — and certainly less synthetic sugar — will change the equipment finance landscape. The companies with access to capital will dominate in taking the opportunities; others will be consolidated or eviscerated. The results will affect finance companies, their direct customers, and their indirect business conducted through manufacturers and vendors in the following ways:

  • Customers will have a harder time securing capital and will turn more to equipment finance companies for acquisition financing.
  • Vendors and manufacturers will find that sales-assisted financing will be more important, as will longer-term and stable program agreements.
  • Equipment finance companies will have to maintain stronger balance sheets and scale to compete. Having capital lets them make long-term commitments to vendor programs, offer leases and loans, take residuals, build up internal equity, and be seen as a consistent and reliable player in the marketplace.
  • Consolidation of companies will continue, with more of the total industry volume of business being done by fewer companies.
  • Most equipment finance companies will be offering a finance product based on credit. The others will offer an asset-acquisition solution with packaged attributes and reliance on collateral, as shown in Figure 1.

Within these two models will be further variations driven by the available funding, strategies, risk appetites, capabilities and the varied needs of customers.

  • The finance product, in which convenient money is the value delivered to the customer, will include loans and finance leases. Rate will be the primary competitive attribute. This will tend to be a commodity product with rate dominating. Efficiency of operations will be essential.

This value position will be offered in small-ticket and low end middle-market vendor programs and middle-market direct. Banks should dominate this area because it fits within the “footprint marketing” and “total customer pocketbook” objectives of the bank. It meets a certain range of finance company, vendor and end-user needs. Captives can also compete here if they have scale and financing, while otherwise smaller captives should ally with vendor finance providers.

This is an area where a very few established independents will be found, funding realities will not allow it.

  • The asset acquisition solution product with packaged attributes and reliance on collateral will be offered in the upper end small-ticket through the middle market. The values offered to the customer will be in the form of managing assets and managing risks. Customers will value the bundling of several benefits within one transaction.

This value position requires very different capabilities. It will be offered by independents and some captives. Personnel with combined sector/asset knowledge and finance transaction attributes knowledge will be essential. Pricing is “premium” in that it is easier to sell on more than rate, and attributes will be differentiated.

In summary, today’s equipment finance candy man has learned his lessons. The industry can’t go sugar-free, and the ingredients must be tested and measured against best practices, then packaged for the company’s sweet spot and for its customers’, vendors’ and VARs’ varied tastes, because the competition will be tougher than ever.


Michael J. Fleming is a principal in the North American region of The Alta Group, and assists clients in strategic consulting, leadership development, market and competitive analysis, unilateral and multilateral agency and association projects. He is the immediate past president of the ELFA, and under his nearly three decades of leadership, the ELFA enjoyed sustained program, productivity and financial growth. Fleming’s background includes positions as a professional educator, business manager and leader of nonprofit volunteer organizations. He is a former chancellor of the Exchequer Club of Washington, and is a member of the Board of Governors of the City Club of Washington as well as other professional organizations. The Alta Group is a global consultancy exclusively focused since 1992 on helping equipment leasing and finance companies implement best practices. For more information, visit www.thealtagroup.com.

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