The broker community for equipment leasing and financing has not been around that long. The first association, WAEL (Western Association of Equipment Leasing), began in 1975 and was followed by the Eastern Association of Equipment Lessors in 1979. The new kid on the block, the National Association of Equipment Leasing Brokers (now the American Association of Commercial Finance Brokers), was formed in 1990.
Imagine being a broker back then when there were no fax machines, cell phones or internet. It wasn’t until 1977 that Federal Express was able to deliver overnight packages. A lot has happened since the industry began but nothing like what we have experienced this year with the coronavirus. This is the first recession in modern times caused not by economic factors but by a health crisis.
The earliest cases of COVID-19 were confirmed in January. Since then seismic changes have occurred in the U.S., affecting every man, woman, child and finance broker. Anything that impacts the economy especially impacts the leasing and finance broker community. For this article I reached out to several brokers and funding sources to get their feedback and draw some general conclusions.
Customer Effects by Sector
One of the most glaring observations is that individual sectors were affected differently. If your business relied heavily on medical, restaurants, fitness, senior living, hotel, hair salons, airlines, cruise lines or specialty retail, to name a few, you really felt the negative economic impact of the virus. If your niche was in automotive, construction, emergency services, churches, waste management or mortuaries, your business most likely is steady or even good.
Even within certain industries there were winners and losers. Take signage for instance. If your customers are mom and pop T-shirt screen printers, there were not many school or amateur ball leagues playing this past spring or summer. If, however, your customer is making indoor signs for the local supermarket, you may have plenty of work.
Similar dichotomies occurred in the medical field. If you were dealing with physicians or operating rooms, those businesses were shut down for several months in most areas. But financing for ambulances, PPE equipment or hand sanitizing manufacturing equipment was going full tilt.
Geography makes a difference as well. Garbage companies picking up trash from restaurants or retail in New York City were decimated while a similar business in Georgia or Florida might have felt less of an impact. Looking back, how many of us wished we had been in the plexiglass or ventilator business?
Impact on Equipment Finance Businesses
On the funder’s side of the equation, most were affected to one degree or another. Some funders like Pawnee Leasing temporarily shut down and laid off employees while Marlin reportedly furloughed about 120 employees. However, others were able to survive without downsizing, while some furloughed a few employees but brought them back after a few months. Most lenders, at least initially, ran their operations in whole or in part via remote working. Some are still working remotely, which may be a sign of business practices going forward. Even the way lenders paid vendors was impacted, as some only paid via wire or ACH, while others preferred the checkless method but continued to issue paper compensation.
Many lenders initially offered deferments in one form or another. The range ran from a few percent to around 30% of portfolios. The deferments took many shapes, but they generally were for three or four months. Some offered three months of contact payments, some reworked the contracts and others added the deferment period to the end of the contract. Some lenders whose client’s businesses were shut down completely allowed them to make minimal or no payments until they could reopen. Many lenders also are offering a second round of deferments to those hit the hardest. The majority of those who took deferments are now paying on a regular basis.
As is the case in most recessions, the “credit pendulum” took a wide swing toward caution as well. Credit modifications and requirements were all over the board. Some lenders said they were just looking more closely at applications, while some made major changes. Many app only lenders cut back on their appetites significantly and required higher FICO scores and longer time in business for the amount requested. A few ceased doing app only business completely.
Several lenders started looking for bank statements even on smaller deals, and many began requiring the entire statement rather than just the summary page to see if the applicant had taken Paycheck Protection Program money. Many lenders began requiring COVID-19 statements and/or put certain industries such as restaurants, fitness and hospitality on a caution or restricted list. Several lenders who were doing startups have quit for the time being. Conversely, a few lenders offered lower rates to stellar credits in essential industries.
Issues for Factors
Factoring, which has grown in popularity in the broker community as of late, has had its own unique set of problems. When a factor buys an invoice from a client, it looks to the ultimate debtor’s creditworthiness to determine if it wants to continue to do business. The factors are re-examining their customers’ ability to pay the invoices, especially in negatively impacted industries and states.
With the government pumping money into the economy in the form of PPP money and SBA loans, some businesses used that money for operations and paid off their factors. Additionally, factors were negatively impacted when the SBA loans took the first position of payment priority ahead of factors. Most factors are not willing to do this. One bright spot has been an uptick in some factoring prospects providing PPE looking for purchase order financing.
Real Estate Revival
The sentiment among the real estate broker community was that lending pretty much dried up early on, but in the past few months, it has gotten back to a semblance of normal. The residential market is pretty hot and manufactured housing is experiencing long lead times. One headline from Poynter put it this way: “Lumber shortages and prices are soaring amid tariffs, mill closures and a whole lot of DIY projects.”
Business for Brokers
Responses from brokers — also referred to as third-party originators — were all over the board as well. Early on, most brokers saw a decrease in app count coupled with tighter credit requirements from their lenders. As the stimulus money began flowing into the economy, many brokers saw an uptick in app counts. The consensus was that activity started to pick up in May and June. The summer months are often spotty due to vacations and that seemed to be the case this year.
As mentioned at the outset of this article, sometimes it’s just the luck of the draw. If a broker had a niche in an essential industry, their business was likely to continue to do well and possibly improve. On the other hand, if a broker was financing physicians, restaurants or fitness centers, their business was likely hit hard — in many cases, very hard. Most brokers are entrepreneurs and by nature are cautiously optimistic.
One thing the broker industry has shown over the years is resiliency and the ability to adapt to change. In the early days of the pandemic, some companies that had bank lines of credit drew them down as a precaution, leaving the banks less liquid. This tightening has had a few banks reaching out to brokers they have worked with to refer business to them rather than have their deposit relationship jeopardized by seeking other banking relationships.
The last question on the questionnaire was, “What is your outlook for the next nine months?” The responses were as diverse as our industry. There were, however, a few common threads. Most responses, whether they were generally positive or negative, contained the word “uncertainty,” and many thought it would depend on the outcome of the election. Various sources opined that we will experience a rebalancing between now and the end of the year, including a significant number of businesses defaulting or filing for bankruptcy after the PPP and SBA money ran out.
Others said they didn’t think a lot of small businesses could weather the storm in the long run. The opinions also differed depending on the respondent’s geographical location. I saw terms like volatile, unpredictable, optimistic, cautiously optimistic, pessimistic and “not good.”
A recent National Restaurant Association survey recently reported that 100,000 locations have shut down completely. One person I spoke to in mid-August said they thought we were currently in the eye of the hurricane and he was concerned about what was going to happen when we passed out of the eye through the other wall. Another respondent put it this way: “Some businesses are on life support, some need major surgery and some will just go to hospice.”
Bob Bell, CLFP, is the owner and managing member of United Funding.