As equipment finance continues to prove its strength, Kenneth Weinberg asserts that the next chapter will depend on how boldly the industry embraces technology, legal change and evolving asset types.
Regular readers of this column know the vital role that equipment leasing and finance companies play in the U.S. economy and the many areas in which we excel. This edition of Dispatches from the Trenches offers a well-deserved pat on the back — recognizing where we outperform other commercial finance products — followed by a gentle shove to keep evolving.
THE PAT ON THE BACK: CREATIVE, DIVERSE & EFFECTIVE
Although our industry rarely dominates headlines, it consistently delivers results — marked by creativity, precision and a problem-solving capacity that few other financing products can match. It is an industry defined by its efficiency and effectiveness, providing businesses with essential tools to operate, expand and compete. Equipment finance is not just about money. It is about structure, adaptability and detail. A well-designed equipment lease or financing aligns with a customer’s Capex needs, business plan, risk tolerance and long-term strategy. The result is financing that works on paper and in practice.
Industry experts guide customers through a colorful menu of options — TRAC, split-TRAC, ALIAS, EFA, first amendment, operating and capital leases, Article 2A finance leases, leveraged leases, service contracts, IPAs, hybrid or bundled transactions, synthetics, progress payment relationships, interim funding arrangements, vendor programs and more.
For customers whose tax position does not allow them to utilize the tax benefits associated with their business assets efficiently, we offer a solution tailored to your needs. For other customers who want the tax benefits of owning the financed assets, we can handle that request, too. What if the customer still wants the tax benefits of ownership but also needs to use leasing terminology for one reason or another? No problem, we have your back. For those with accounting considerations, we have options. Even complex situations requiring a true lease through one lens and a secured loan through another can be addressed with synthetic leases.
Of course, the above discussion of our flexibility primarily focuses on economics, but our industry is also customer-centric in other ways. For example, we allow customers to acquire the assets needed to run their
business without using working capital lines or complex credit facilities. Moreover, 100% financing is standard, not exceptional. We often structure financings specifically to address the flexibility our customers seek when replacing or upgrading needed business assets on a consistent schedule.
Even with all the variety and creativity reflected in our financing structures, our documentation tends to be lean, effective and — occasionally — elegant. For example, many in the industry use master agreements to provide the general terms and conditions pursuant to which a variety of financing products are offered, with individual “schedules” that reflect the specific financing and related equipment or collateral that incorporate the terms of the master agreements.
Our closing process is also super-efficient, as we utilize our deep understanding of specialized laws and customs associated with the acquisition and financing of equipment or other business assets. Reliance on purchase money security interests, Article 2A finance lease concepts, chattel paper provisions and other best practices of the industry allows us to close deals quickly and often with significantly less cost than other forms of finance.
Of course, we could only offer these options to our customers for so many years if we did so in a manner that adequately protected our interests and those of our investors and other funding sources. We excel here as well.
We know how to verify that the title to the equipment or other assets is transferred to the correct party, and we understand that the law often looks to substance over form. We know the best way to perfect liens across various asset types and recordation systems. Yes, we even wear a belt and suspenders and perfect a precautionary security interest in assets we think we own.
We know how to determine the true value of the leased or financed assets in a default situation or at the end of the term. In many cases, we even understand the nature of the asset’s depreciation curve and how much of a gap there may be at any given time between the financing provider’s net investment in the deal and the value of the leased or financed asset. We know how to track and protect assets during the term, even in the hands of third parties, adeptly addressing maintenance and return obligations unique to the specific assets or nuanced legal concepts like the rights of quiet enjoyment. We know how to protect ourselves when leased or financed assets are destroyed, with proper documentation, insurance tracking and other established methods.
We understand how the leased or financed assets are used by our customers (including the extent to which they are essential assets), when the assets need to be replaced and how to realize maximum value if we ever have to sell them (both in a default scenario or at the end of the term).
We also know how to diversify our exposure to certain customers and/or industries, how to generate quicker fee income and how otherwise to find the right home for deals by using the extremely active, nationwide equipment leasing and finance syndication market — all of which strengthens the liquidity, stability and resilience of our capital markets.
It should come as no surprise that the structures available for assignments and syndications are as creative as the products we offer to customers entering into the financings. We use outright assignments, collateral assignments, discounting of the rents, back-leveraging, warehouse and portfolio lines, leveraged leases, securitizations and more.
As with the direct deals entered into with our customers, our syndication documents are targeted and efficient. A classic example is the standard sort of reciprocal master assignment agreement that allows the parties (and/or sometimes their affiliates) to sell or buy from each other (sometimes serving the role of seller and other times serving the role of buyer) under the same document by use of an individual “specification” for each deal — similar to the schedules referenced earlier for master agreements used on direct deals. Tax and administrative issues are also creatively handled by the use of titling trusts, title agency, fiscal agency and other provisions. Again, efficiency and clear risk allocation serves as the North Star.
THE GENTLE SHOVE: WE MUST CONTINUE TO EVOLVE
It goes without saying in this ever-changing world that we need to continue to evolve with the same fervor we have always shown. There are many areas where we must continue to grow.
We also need to be brave and inquisitive as we reconsider the process we used to locate, conduct diligence, source and close specific deals. For example, no discussion of the modernization of our industry is complete without discussing new technology. Paper contracts have given way to e-signatures, e-chattel paper and e-vaults, reducing transaction time and risk. The 2022 Amendments to the Uniform Commercial Code go further, introducing Article 12 and the framework for “controllable electronic records.” While far from casual reading, these updates lay the groundwork for secure handling of digital assets, tokenized payments and other emerging tools.
It is crucial that we all hear the call to explore, understand, use and finance new technology. Let’s be honest; although our industry is extremely creative and ever evolving, some segments have been slow to adopt technological changes in some areas. Indeed, it took a global pandemic for some to fully switch to electronic chattel paper (or electronic records evidencing chattel paper, for those using the terminology of the 2022 UCC Amendments).
As it relates to the process of closing and syndicating deals, we need to consider whether (or better, when) quintessential elements of the equipment leasing and finance industry should be moved onto the blockchain. For example, could blockchain theoretically replace a titling trust? That certainly seems possible. Could converting more traditional chattel paper into a digital token on the blockchain (sometimes referred to as “tokenizing” the asset) provide a more efficient alternative to electronic vaults? What other advantages can blockchain provide?
Anyone reluctant to explore those concepts should take comfort from previous evolutions in our industry. After all, we traditionally would stamp or otherwise mark one copy out of multiple wet-ink signed copies of chattel paper as the “sole original counterpart” or with similar language, coupled with a roadmap in the documents, to determine which wet-ink version was the sole original counterpart for UCC purposes. Now, we are careful to structure and document transactions in a way that the authoritative copy of the electronic records evidencing the chattel paper can be controlled for UCC purposes. “Papering out” or other concepts are sometimes used as we switch from electronic records to tangible records. In a similar way, we should all be able to reach consensus and get comfortable with when we have Article 9 Chattel Paper versus when we have an Article 12 Controllable Electronic Record (CER).
Of course, with the increasing focus on artificial intelligence all around us, questions abound about when and how to use the latest technology during the life of transactions we enter into (from cradle to grave). The opportunities are endless. Indeed, the (human) author of this edition of Dispatches from the Trenches fed approximately 100 articles previously written by the author, together with a brief outline of this article, into a sandboxed version of a large language model (an LLM). Mere seconds after directing the LLM to generate a first draft of this article in a manner that mirrored the same tone and style of prior articles, the LLM spit out a draft of the requested length.
The (human) author is somewhat pleased to report, as he exhales a sigh of relief, that the AI-generated first draft needed a significant amount of work to live up to the two-decade standard of this column. However, the (human) author also feels it prudent to confess that he was originally impressed with the first draft, even if little of it survived the cutting board.
It should also be noted that we are not merely talking about using technology and new types of software. We must also understand it (with the same expertise with which we understand more traditional equipment) and be able to finance it for our customers. For example, our documentation, our customs and practices and our laws must continue to evolve to address the fact that intangible assets and services and rights are now more widely acquired by all sorts of businesses in transactions alongside the types of hard assets that were historically financed.
As the types of assets that we finance change, we must continue to evolve to allow us to play the same important role we have traditionally served to allow our customers to acquire the assets needed to run their businesses. Of course, when those assets involve licenses, services or other rights, our documents, collateral and our enforcement rights must be viewed through a different lens. The 2022 UCC Amendments blaze a wide path for us to explore as we offer new types of financings. However, we must be vigilant as we construct our new structures and systems on the new landscape forged by these important legal changes.
Long story short: we should be proud of our history and what we have done well for decades, but we must keep pushing forward. Our industry has never been static, and we must keep questioning how we structure deals, how we use technology and how we inspire, cultivate and support the professionals who will carry the industry forward. Creativity is not optional here — it is essential. It is what has set us apart, and it is what will ensure we continue to thrive. In the end, the best transactions are not just well-structured; they are well-considered. And the best professionals are not just knowledgeable; they are curious, committed and unafraid to evolve. That combination — creativity, adaptability and expertise — is what makes equipment leasing and finance not only a
reliable source of capital but also a driver of innovation across the economy. It is a discipline we can be proud of, and one that still has its best chapters ahead. •
Kenneth P. Weinberg is a Partner at CM Law and practices in commercial finance, focusing on equipment leasing, equipment finance and renewable energy project finance. He has penned Dispatches from the Trenches since 2002.
