Sources of Optimism: Maintaining a Competitive Edge in Equipment Funding
by Phil Neuffer March/April 2018
Developments both in the public and private sector have fueled optimism in the ever-positive equipment leasing industry. In this year’s Funding Sources roundtable, representatives from Stearns Bank, Financial Pacific Leasing and Ascentium Capital share their thoughts on the current equipment acquisition environment, fintech and more.
The world of business requires a heavy amount of optimism. Just about every year at this time, optimism is at its peak. Similar to the way a new baseball season instills a sense of hope into fanbases of every team, equipment finance companies are generally optimistic in the early part of a year. This year has proven to be no different, and 2017 also followed this pattern.
As the first quarter ends, that optimism has not abated, matching the perspective of our Funding Sources roundtable participants from a year ago. In this year’s version, Michelle Fuchs and Jim Peach of Stearns Bank, Paul Menzel of Financial Pacific Leasing and Pat Kistler of Ascentium Capital are eager to build on the successes of 2017 and keep growing.
Before looking at what’s to come, we must examine last year. In terms of activity, all three participating companies experienced growth in 2017.
“Overall, activity is definitely higher,” says Kistler, who has been with Ascentium since 2013 as SVP of Sales and is now a business development manager with the company. “Due to the ongoing healthy economic environment, Ascentium Capital has seen growth in new business applications across all of our key vertical markets. Due to the strong market, we are looking to expand our broker and lessor division and have developed a new finance program catered to helping our partners win more vendor accounts and end-user business. We will be taking advantage of capital markets to deliver cost effective financial products.”
Stearns Bank also has seen an increase in deal flow, particularly with existing referral sources as well as new origination sources. The company has specifically noticed increased year-over-year activity in the manufacturing, woodworking, agriculture and rental-yard sectors. But this has not been by happenstance.
“A fair amount of elevated activity can be attributed to Stearns Bank’s increased concentration in these industries, such as industry education initiatives and targeted training for team members,” Fuchs and Peach say. “We also have doubled-down on our membership in trade associations, sharpening our understanding of customer needs and financing drivers. Additionally, Stearns Bank has increased our investment in targeted marketing initiatives, with a substantial commitment to social media and highlighting customer experience and customer exposure.”
For industry veteran Menzel and Financial Pacific Leasing, third-party originators have always pushed activity higher.
“FinPac has continued to see steadily increasing deal flow from our TPOs (third-party originators) since being acquired by Umpqua Bank over four years ago,” Menzel says. “It was dramatic at first because of our lower pricing and expanded credit window. We have grown from $250 [million] to $1.25 [billion]. The growth over the last couple of years, I believe, is a result of our historical commitment to the TPO channel, consistency in service levels and growth of our long-term and loyal TPOs.”
After 2017 led to improved activity, it has only fortified the confidence of those in the equipment finance industry.
“I continue to be very optimistic about our market leadership,” Menzel says. “I am hopeful that CAPEX growth resulting from business confidence and the lowering of taxes will add to near-term growth.”
Kistler points to some of the developments for the economy as a whole as reasons to be hopeful in 2018 and beyond.
“Small businesses still seem optimistic, and we also anticipate further deregulation will further drive economic growth and equipment acquisition across the country,” Kistler says. “Additionally, tax reform should impact small businesses positively this year to help further growth across most industries.”
Fuchs, a VP of Business Development and 22-year veteran of Stearns Bank, and Peach, who joined Stearns in 2007 and now serves as a VP and sales manager, are more encouraged by internal developments.
“The primary source of our optimism, however, is the substantial investment we are committing to technology and easy-access portals that will increase the speed of our funding and provide customers and broker/dealers with 24/7 access to the status of their deals from the minute they hit our system,” Fuchs and Peach say. “With our increased efficiency and technology roll outs in 2018, we anticipate strong market share growth in the coming year.”
As activity has increased, delinquencies are expected to remain relatively flat, which is a positive sign for all industry participants.
“Our historical losses have been acceptable and slightly below projections,” Kistler says. “We are pleased with our unique credit risk model. It boils down to knowing what questions to ask and that makes the difference. We don’t anticipate any significant increase in charge-offs in 2018.”
“Delinquencies have increased over the last couple of years from historical lows following the financial crises, primarily due to the 2018abundance of capital and more aggressive lending. Delinquencies are just normalizing to pre-crisis levels,” Menzel says. “Given the relative strength of the economy and business confidence, I believe they will flatten out at today’s levels.”
“Delinquencies were relatively flat for Stearns Bank in 2017,” Fuchs and Peach say. “We anticipate a slight uptick in delinquencies in 2018, but do not expect a drastic change from 2017.”
Differentiating Through Speed, Technology and Knowledge
Kistler, Fuchs and Peach agree that one of the most important elements of a successful business strategy in the current environment is speed. While doing business without being careful is not encouraged, providing the best deal as quickly as possible is critical.
“Speed and flexibility still drive competitive advantages,” Kistler says.
Menzel also agrees swift action is a key ingredient in getting business done, but he also thinks the way to close deals is much the same as it has always been.
“The formula for getting a deal done hasn’t changed for a long time. Know your customer, treat them fairly and provide fast and convenient service,” Menzel says. “Meeting the information and regulatory requirements of the funder are non-negotiables. It is the security driven world we live in.”
But speed alone cannot win business. The onslaught of technological advancements has made it imperative that companies incorporate these service enhancements into their process.
“Technology also helps us differentiate our service levels and enable successful relationships with our brokers and lessors,” Kistler says.
“Stearns Bank is an innovator, continually evolving with new product innovations and faster, easier ways for our customers to obtain financing,” Fuchs and Peach say. “When we go into the marketplace, we are determined to quickly identify exactly what our customers need and deliver.”
Aside from speed and technological acumen, a successful foray into the marketplace requires a true understanding of the customer.
“Once the broker identifies the opportunity, (knowing the customer) they will want to work with a lender that can deliver fast credit decisions based on the client profile, including partnering with a funder that has competitive application-only thresholds and also ease of documentation to get the deal off the street as soon as possible,” Kistler says. “To get a deal booked and funded quickly, brokers should work with lenders that have simplified documentation as well. Lenders that offer pre-funding to the vendor can also help the broker and lessor win larger programs.”
Disruption via Fintech
While the recipe for getting deals done is multifaceted and established, the emergence of financial technology platforms threatens to disrupt the equipment finance landscape. According to a recent study from the Equipment Leasing & Finance Foundation, fintech may not become a competitor as a major source of equipment funding, but it will impact equipment leasing overall.
“As equipment finance companies seek ways to increase customer satisfaction and market share, fintech companies offer innovative examples for our industry,” said Jeffry Elliott, senior managing director of Huntington Equipment Finance and ELFF chairman, in a press release.
For many companies in the equipment finance space, the example fintech has set has only increased a drive to be as efficient and competitive as possible.
“Fintechs have provided more alternatives for customers to access financing and has pushed traditional banks and finance companies to invest in technology to increase online access and faster turnaround on funding,” Fuchs and Peach say.
“Fintech has been a very positive force in raising the service level expectations in the marketplace. It is a convenience differentiator that drives application flow,” Menzel says. “But it is not a panacea in a risk context. The disruptive impact is likely to be in portfolio performance during the next down cycle. The effect on the origination side is undeniable. The ultimate impact on risk is yet to be determined.”
Kistler believes that Asentium Capital actually shares a kinship with the fintechs that have emerged over the last few years.
“Since our inception in 2011, Ascentium Capital’s leadership team had the vision to incorporate technology into our business process to create operational efficiencies as well as developing sales tools and a finance platform that benefit our brokers, lessors and small business customers,” he says. “We feel like we are a hybrid, being able to constantly advance and differentiate ourselves due to our technology platform, but it’s also our people — those that make the decisions every day and make our process work — that make the difference.”
Tax Reform & Infrastructure
Even if optimism is already high in the equipment finance industry, there are potential developments to come during the rest of 2018 that could amplify the positive sentiment. The passage of the Tax Cuts and Jobs Act in December signaled a boost to the economy. With more cash on hand, businesses are free to use savings to invest in capital expenditures, such as equipment acquisition, which may have been subdued in recent years.
“Most expect tax reform will lead to an increase in cash flow for certain businesses, which could prompt those business owners to make equipment purchases they might otherwise have held off making,” Fuchs and Peach say. “If businesses that benefit from the tax reform reinvest their increased cash flow into their businesses, buying more equipment or expanding, our deal flow should increase.”
“I am hopeful the tax reduction act, which contained negligible ‘reform,’ will spur investment in equipment,” Menzel says, adding he does not think all actions taken Bankwill result in improved business conditions. “My fear is that our ballooning deficit spending and debt load will result in rapidly rising interest rates which may trigger recession. On the regulatory front, we have not seen much, if any, relief.”
Aside from the impact of tax relief, the continued push for infrastructure spending could also lead to a major boost in equipment acquisitions and the companies that finance them.
“There is optimism that if the administration’s infrastructure improvements create jobs for a large number of businesses across a wide variety of industries and business sectors, the need for equipment purchases by a wide range of small businesses across the country will lead to increased wages and bottom line business income with continuing improvement for key economic indicators,” Fuchs and Peach say.
Increased activity and a potential rise in the need for equipment financing brought on by tax reform, infrastructure spending or anything else will lead to more competition. That has caused Kistler and Ascentium Capital to create new programs to maintain their competitive edge.
“Due to the strong economy, we are seeing increased competition from banks as they expand their presence in this marketplace,” Kistler says. “We will be introducing a new incentive program based on an achievable origination volume for new broker relationships. Once they experience how easy we are to work with, we believe we will win them over to become long term funding partners. We are also promoting more discounting relationships from our larger broker and lessor base to more effectively fund their higher volume deal flow.”
For Stearns Bank, increased competition will likely only serve to improve its own performance and offerings.
“We fully expect to see more and different non-bank competition in equipment finance. And strong competition only tells us more about our customers’ wants and needs and gives us an opportunity to become better and even more responsive to our customers,” Fuchs and Peach say. “We welcome newcomers and disrupters as a challenge to improve and opportunity to innovate and further excel.”
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