Jim Merrilees,
Vice Chairman,
The Alta Group

The pandemic-induced economic disruptions that spawned stubbornly high inflation, supply- chain bottlenecks and inventory shortages created by manufacturing shutdowns have receded somewhat, much to the relief of the equipment finance industry. However, they have left behind a lingering inflation that is still tempting the Federal Reserve to continue a cycle of rate hikes. The resulting mixed-bag economy is spiking fears about an impending recession.

Although this environment is making already-conservative large banks into even more cautious lenders, it’s a strong opportunity for independent equipment finance companies. Independents have fewer bureaucratic and regulatory constraints. This allows them to nimbly and quickly enter new markets, obtain faster credit decisions and tap into long-established relationships with customers and third-party originators.

Today, many independents are leveraging these advantages in navigating through the economic headwinds. They are able to provide smaller, capital-hungry clients with new financing sources and more creative deal structures and to expand into new business markets with the help of sympathetic investors.

Institutional Memory: Surviving and Thriving Over Time

It’s no surprise that independents are flourishing under these conditions; they do so even in recessionary times, and are resourcefully securing loans and leases. However unsettling or unpredictable the economic downturns have been, independents have survived and thrived, even as people consistently predicted they would disappear. Independents have historically provided financing in tough times when big banks wouldn’t.

It’s no different now. It is different in boom times, when big banks make the most lucrative deals with the best credits because they always have the lowest rates. However, when banks start retreating, independents step up; they can enter new markets faster with more price elasticity. For instance, even as the price of money has risen, independents are putting money in play and arranging financing at reasonable margins. Even though the rate is much higher than what a bank would quote, the independent is making a credit decision in a day versus what might be a month-long process from a bank. Since financial planning is a weakness for many small business, lessees and buyers, that turnaround time is a lifesaver.

What’s happening now is a price normalization, a departure from the artificially low-to-no rate environment that’s existed for so long. While that’s a shock to many newer independents and brokers who have known nothing else, the people leading their companies come from a core group that has the institutional memory to safely steer through the choppy economic waters.

The economy’s back-and-forth fluctuations are paralleled by the fluctuating demand for good sales people; the demand is greater in an improving economy, and lesser in a slower one. Many independent finance companies that do direct sales, as well as third-party broker business, can rely on their sales force when times are better. When they’re worse, and direct sales are down, they can compensate by leaning on their broker connections.

Small-Ticket Success in Newer Markets

Independents also are well-positioned to penetrate newer markets and make smallto- middle-ticket transactions. Instead of focusing on whether or not emerging trends will pan out over the long-term, as banks tend to do, independents are following product and service demands now, taking a retail approach to find capital for the ground-level operators in a market.

A prime example is electrification, which is having a seismic impact on the auto and landscaping industries. This is happening through developments such as California’s ban on the sale of new gas-powered cars after 2035, and the city of Pasadena’s recent prohibition on gas-powered blowers, which is prompting landscapers to switch to battery- powered blowers.

A big bank might respond to these developments by asking if an electric lawn mower, or battery-powered blower, will hold its value like a gas-powered mower or blower. They probably won’t maintain value, at least right now, but instead of letting that discourage them, independents see all the commercial and neighborhood landscapers in California and are making deals to put these small-ticket items into their hands.

Independents really shine on small-to-middle- ticket orders with the bread-and-butter operators who are the backbone of these industries. The Infrastructure Act has catalyzed business for construction industry contractors on projects such as building and repairing bridges, where contractors will require more equipment to do the jobs. Maybe these people aren’t top-line credits, but they’ve gone through hard times. They need equipment to handle these build-or-repair projects, and independent equipment finance companies are supplying them with it – again, at good margins.

Gary Souverein, president of Pawnee Leasing Corporation, recently made two keen observations that further clarify why many independents are bullish on their prospects.

Souverein first notes that the independents’ mentality is to predict and pinpoint opportunities that might emerge in the wake of the banks’ credit pullback. Independents usually have fewer people who must check off on approvals. While banks might see the same possibilities in the field, they can’t react quickly enough to them. Independents also know how to find and mine a niche equipment category within a larger market that, in itself, may not be so lucrative.

Souverein’s second observation concerns all the liquidity in the market. Independents are enjoying broader access to the public markets through the issuance of equipment- backed securitizations, albeit at higher costs than in recent years. Banks, life insurance companies and private investors aren’t just buying a piece of these independents, but also hundreds of millions of dollars of aged small-ticket leases in public market sales, which opens the independents’ credit lines.

THE VALUE OF BROKER/LESSOR RELATIONSHIP NETWORKS

As free agents, independents can join interconnected webs of relationships with third-party originators (brokers), lessors and vendors that make it that much easier to facilitate transactions. Over time, the multiple players in these networks develop a mutual familiarity and trust that translates into business that benefits all of them, particularly in a volatile economy that requires more imaginative financing. These relationships give lenders entrée into their large customer base. They frequently have deep insights into specific industry markets and market niches; they can improve efficiency by handling a lot of the logistics, like sourcing and vetting, and they can be a cost-effective sales force alternative to investing in more sales people.

Good brokers can be invaluable jacks-ofall- trades or specialists to independents’ lenders. They can make calls on the street to manufacturers, distributors or, very often, to end users (direct lessee calls) to find the application. They can then screen it, vet the funding source’s probability to purchase the transaction and even call references and do bank checks. It’s really up to the independent, which can decide how much third-party involvement they want in the transaction.

With some small lessors with limited capital, independents sometimes make business happen by entering into purchase-and-sale agreements, where the lessor buys the equipment, sells it to the independent and warrants title. Here, the lessor gets a favorable rate for doing the due diligence on an application. The independent can eliminate the possibility of a first payment default and, in a sense, make use of the lessor as a sales force and an administrative back room that actually completes the transaction.

ABOUT THE AUTHOR: Jim Merrilees is a vice chairman at The Alta Group who, in collaboration with the advisory’s practice leaders, advises on ways clients can enhance operational efficiency in their organizations and added value in equipment finance markets. Over four decades, Merrilees’ career has been highlighted by historic firsts in the industry. His previous experience includes senior positions at Channel Partners Capital, Quiktrak, Pacific Capital Bank, Colonial Pacific Leasing, Pitney Bowes and Textron Financial.