Phil Neuffer,
Senior Editor,
Monitor

In equipment finance, you must turn to its people because as much as the sector has been built on dollars and cents, not to mention iron and steel, the people who form the community within the equipment finance space are what makes it so unique and enduring.

“This industry has been so strong because of the people. The people are risk-takers, entrepreneurs, willing to go outside the box,” Bruce Winter, president of FSG Capital, says, echoing a chorus that is sung across the entire equipment finance ecosystem, especially when looking at its various industry associations, such as the Equipment Leasing and Finance Association and the National Equipment Finance Association.

“We are involved in several other businesses outside of the ELFA general equipment business. They all have their various industry associations, but none of them are like the ELFA. This is such a collegial and collaborative association and environment. One day you’re competing for the same deal, the next you’re a capital market syndication partner,” Dave Fate, CEO of Stonebriar Commercial Finance, says.

The relatively small size of the equipment finance community plays a large role in its ability to remain close-knit despite its more than 50 years as an established pillar of the U.S. economy. Such a congenial marketplace yields many benefits for all participants, whether that be in protecting the integrity of the products themselves or in improving processes so every company has a chance to thrive.

“It’s ultimately not a huge industry, so most of the key players, people who are running companies, know each other or at least are maybe one degree of separation away,” Chris Enbom, CEO of AP Equipment Finance, says. “That helps our industry to be self-regulated. In other words, if there’s a bad actor or a bad player, everybody knows about it.”
As Robert Preville, founder and CEO of APPROVE, explains, rather than cut-throat competition, players in the equipment finance space participate in “co-opetition,” sharing insights and best practices to ensure the industry remains robust.

For an industry that prides itself on its people, the equipment finance industry has not always been as welcoming as it aspires to be. In recent years, much more emphasis has been put on improving diversity, equity and inclusion in the industry, particularly at the association level, with both ELFA and NEFA introducing their own DE&I committees and the ELFA’s Women’s Leadership Forum continuing to attract more and more attendees every year. However, the industry still requires drastic improvement, particularly at the most senior levels.

“There is no doubt that significant progress has been made in recent years in various aspects of gender equality and diversity. However, you still don’t see a lot of women in the senior roles or at the executive tables, especially women of color,” Maggie Holly, credit and operations manager and senior vice president at Hanmi Bank, says. “Our journey towards achieving true gender equality and inclusivity is ongoing. Together, we can make a difference by supporting and empowering women in all fields, providing equal opportunities and challenging biases and barriers that hinder their advancement. It might take years, but we need to remain committed to this cause to make it happen sooner rather than later.”

“We recognize that there is an issue and we’ve begun to do some better things about making a stronger effort to get out and hire, but you need to make people feel welcome and comfortable and that you’re on their team,” Jonathan L. Fales, divisional president at LEAF Commercial Capital, says. “We still do an uneven job with that. Just look at the executive ranks to see that”

Even though progress remains slow, the equipment finance industry must continue to focus on improving representation, especially as the demographics of the workforce continue to change.

“As we go forward, the workforce is going to be more diverse because of the access to remote work, the access to different locations, the access to more talent,” Kyin Lok, CEO of Dext Capital, says. “The more that we broaden our ability to reach out to the people who normally wouldn’t have been part of the industry 10, 20 or 30 years ago, the better our skill sets are going to be.”

In addition to improving racial and gender diversity, the equipment finance industry has also identified a need to get younger and provide more extensive leadership training and opportunities.

“There’s a huge drive to really raise leaders in the industry to promote thought diversity, but also to raise awareness of this industry,” Deborah Reuben, CLFP, CEO and founder of TomorrowZone, says. “If we want to attract new, young, bright talent into the industry, then we need to raise awareness [of the industry itself].”

Efforts to improve equipment finance for all people runs parallel to the industry’s desire to further tighten the bonds formed between all participants in the marketplace. According to Shari Lipski, principal at ECS Financial Services, that passion to be true partners with business collaborators, vendors and customers has fueled the industry for decades.

“I think there’s a unique and distinct quality to our industry and aspect of our work. As we actively and meaningfully engage with the companies and people we support using various finance products, we contribute to their growth and aid in their long-term development and success,” Lipski says. “This involvement elevates the entire experience to a higher plane.”

Passion alone can’t sustain a business, not to mention an entire industry, and equipment finance has not survived and thrived for more than a half century just because of the dedication of its people. According to Anthony Cracchiolo, president and CEO of Equipment Finance at U.S. Bank, the equipment finance industry has always been rooted in the essential-use nature of the equipment it finances, providing an inherent resilience to the sector.

“Things that are driven by necessity usually last and that’s the industry’s secret,” Cracchiolo says.

That secret is at the heart of what Jeff Bilbrey, CEO of Leasepath, calls the engine that powers global economies. After all, the equipment finance industry is a nearly $1 trillion enterprise, with the companies in the 2022 Monitor 100, an annual ranking of the top 100 companies in the industry, surpassing $530 billion in total assets, a significant increase compared to the $134.78 billion reported in the ranking’s inaugural year of 1992 and miles ahead of where the industry was 50 years ago.

The Evolution of an Industry

During its infancy in the 1970s, the equipment finance industry grew from the leasing of gargantuan mainframe computers housed in warehouses with a tiny fraction of the processing power that smartphones have today. Spurred by the investment tax credit baked into the Revenue Act of 1962, leveraged leasing was the preferred structure for many years, as it allowed a lessor to place a multi-million-dollar asset, take 10% off as a tax write-off or credit and leverage the lease. As Paul Bent, senior managing director of The Alta Group, explains, this meant lessors never really had any investment in the deal. “It was like magic,” Bent says.

This almost too-good-to-be-true setup came to a halt in 1986 with the passage of the Tax Reform Act of 1986, which was one of several tax law changes the industry navigated during the 1970s and 1980s. However, the 1986 legislation eliminated the tax credit that made leveraged leases so popular and served as one of the most critical turning points in the history of the equipment finance industry.

“I can remember people when I was coming up for partner at my law firm saying, ‘What happens if Congress gets rid of the investment tax credit?’” Stephen Whelan, senior counsel at Blank Rome, says. “Less than 10 years later, Congress did get rid of the investment tax credit, and guess what? The world did not come to an end. The professionals in the equipment leasing and finance arena devised new structures that weren’t dependent on upon a 10% or 7% investment tax credit.”

By shifting to more efficient ways of monetizing rentals from a lease in response to the loss of the investment tax credit, such as packaging sales of receivables and securitizations, the equipment finance industry underwent one of its first major transformations. The new environment of the late 1980s and 1990s created an industry that was much more akin to banking than it had been previously, ultimately leading to significant growth in the number of banks participating in the sector, a trend that has continued to this day. In 1992, there were 35 bank-owned equipment leasing companies in the Monitor 100, with only five in the top 25 and none in the top five. In the 2022 Monitor 100, there were 55 bank-owned equipment finance companies in the ranking, including top-ranked Bank of America Global Leasing, which was one of 11 banks in the top 25.

The changes brought on by the Tax Reform Act of 1986 are just some of the many marketplace fluctuations the equipment finance industry has had to deal with during its history. The industry has also dealt with more than a few recessions, with none bigger than the global financial crisis of 2008. However, despite such downturns in the economy, even ones as catastrophic as the tumult of 2008, the equipment finance industry has weathered the storm, largely due to the same thing that allowed it to pivot in the face of tax law changes in the 1980s: adaptability.
“I’ve been through some up and downs in the market,” Marci Slagle, CLFP, president of BankFinancial Equipment Finance, says. “But it also creates huge opportunities … I had some of my best years in 2008 when we were going through one of the big downturns.”

The industry’s resiliency and adaptability has also been on full display through the increasing digitalization of the finance world as a whole. Ever since the advent of the internet in the 1990s, the way business is actually conducted on a day-to-day level in the equipment finance industry has changed dramatically and frequently, but the industry had grown accustomed to changing technology and business practices before then.

The early days of the industry were characterized by lengthy in-person negotiations, typed contracts and wet ink signatures. Then, in the early 1980s, the fax machine revolutionized how applications were submitted and funding was approved, but there still remained a need to make bank and trade calls, get verbal confirmations and calculate amortization schedules and interest rates, often by hand until the HP 12c financial calculator became an industry norm.

“When I first started in the industry in 1991, everyone would be waiting for the FedEx man to arrive. We would know how much work we had for the day based on the thickness of the package. We relied on wet ink signatures that had to be blue so we knew they were original, and the backup was the fax machine,” Deb Baker, head of worldwide leasing and financing at HP, says.

The ability to communicate and contact clients continued to improve, albeit slowly, with the introduction of devices like bagged cell phones (no, seriously) and pagers, but once personal computers became commonplace rather than a status symbol, the “modern era of equipment finance” really began, helping to introduce greater efficiencies in the marketplace, such as through the introduction of PayNet and other digital data sources. The continued development of enhanced digital tools has also created a larger ecosystem of service providers dedicated to helping equipment finance companies transact more quickly and effectively.

“People focus on doing what they do best rather than doing everything, so there’s a whole variety of different functions that have been outsourced and the industry is better off for it,” Tom Ware of Tom Ware Advisory Service says.
The COVID-19 pandemic further accelerated technology adoption and dramatically altered the way business is conducted in equipment finance, just as it has in most industries. Negotiations are now more commonly conducted via Zoom meetings, companies are more comfortable with remote working environments and digital signatures have gone from emerging solution to industry standard.

Regardless of the tools being used, whether they be a fax machine or a laptop, the creativity of the equipment finance industry still permeates its interactions with customers.

“We do see a lot of new innovation, but we still do things the way we have for 20, 30 years. How we accept an application, how we fund. The systems might be different, but the processes are pretty much the same,” Mike Jones, president of equipment finance, First Citizens Bank, says.

Envisioning the Future

As much as its adaptability has allowed it to continue to grow across the last half century, the equipment finance industry of today is still ripe for change, according to Bill Verhelle, CEO of QuickFi by Innovation Finance USA.

“Over the last 50 years, businesses have tried to get incrementally better. They’ve tried to generally do things the same way but just a little bit faster and a little bit cheaper,” Verhelle says, noting that the industry’s stability is commendable, but that its siloed and hierarchical nature will need to be shifted to keep up with the next wave of changes headed its way.

To its credit, the industry is increasingly prioritizing its ability to face the future, according to Reuben. “We used to have to really try to convince people that digital transformation was needed, that innovation was needed, and now we don’t need to try to drag anybody into the future,” Reuben says. “I think people got the message and now we’re pursuing how we can make this happen.”

“Utilizing technology more effectively will be paramount to ensuring long-term success. As adaptable as the equipment finance industry has been over time, understanding our customers’ needs and proactively providing technology solutions will be critical,” Tawnya Stone, vice president of strategic technology at GreatAmerica Financial Services, says.

Being quicker to identify and adopt new technology trends will be important for equipment finance’s future, especially as artificial intelligence, machine learning, the Internet of Things, blockchain solutions and more continue to permeate the world and the industry itself. However, when taking a more long-term view, the next big transformation initiative will be cracking the usage-based financing conundrum.

“The concept of ownership within 50 years will dissipate,” Brett Davis of Rinaldi Advisory Services, says. “You’re going to see more of power-by-the-hour, equipment-as-a-service rather than an asset and that will change the shape of this industry completely.”

“The next 50 years of the industry are going to be shaped either by fintechs who will take a different approach to underwriting, documentation and payback, or it’s going to be a company in an adjacent industry that’s going to disrupt that nobody sees coming today,” Baker says. “I don’t know what that adjacency is going to be, but whoever solves true subscription, true infinite flexibility, a rental like model, is ultimately who wins the game.”

Some equipment finance companies are already providing such usage-based solutions, but universal prevalence of such models has yet to take hold. As Preville predicts, that could mean the industry’s top competitor may end up being an organization from outside its own ranks, especially as more financial technology firms continue to enter the arena.
In addition to the financial benefits of usage-based and as-a-service models, these types of solutions could also play a role in equipment finance’s ability to improve sustainability and lead financing initiatives to combat the potentially catastrophic effects of climate change.

“I genuinely think that asset finance and leasing has an opportunity to be part of the push for climate and sustainable financing,” Andrew Denton, CEO of Alfa Financial, says. “There’s a natural fit for equipment finance, but at the heart of it, as we’re effectively getting people to pay for the things that they use rather than just buy stuff and then leave it.”

As the product mix in the equipment finance sector evolves, it could lead to changes in the competitive landscape.

According to Bent, since the 1980s, equipment finance has become more about buying and selling money rather than equipment. However, if usage-based and as-a-service models become the norm and refurbishing and re-leasing equipment becomes even more popular, there will be a return to focus on the equipment itself, which Bent says would lead to a shift in prominence back toward non-bank lessors. In addition, many of the innovations the equipment finance industry will undertake in the future will rely on even greater amounts of data and automation, which could have benefits as well as drawbacks.

“It’s great that we’re becoming more data-driven, but sometimes data can cause actions that aren’t necessarily creative, thoughtful or human,” Susan Carol, CEO of Susan Carol Creative, says.

Given that the equipment finance industry has survived and prospered for more than 50 years thanks to its people and ability to adapt, the true challenge in its future will be maintaining the successful hallmarks of its past while embracing the opportunities on the horizon.

ABOUT THE AUTHOR: Phil Neuffer is senior editor of Monitor.