The equipment finance industry posted a solid year of growth in 2017, and recent data on business investment and confidence suggest that the industry is likely to repeat or improve on that trend in 2018, according to a new study, the 2018 Equipment Leasing & Finance Industry Horizon Report released by the Equipment Leasing & Finance Foundation.

The study, commissioned by the Foundation and prepared by Keybridge, reveals that approximately 60% of the $1.7 trillion in total private and public equipment and software investment in 2017 was financed, resulting in an industry sizing estimate of $1.01 trillion.

The report draws on the results of a new end-user survey the Foundation conducted in August 2018 of over 400 businesses, of which 255 acquired equipment in 2017. Respondents reflect a diverse mix of small, medium, and large firms across a range of industries with varying equipment needs, providing a reliable snapshot of overall equipment acquisition trends. The end-user survey was intended to allow for an interim update of the Foundation’s industry sizing estimate, along with select vertical- and industry-specific breakdowns. The Foundation intends to commission a full-scale market-sizing study with additional detail in 2019.

“The Horizon Report provides the best elements of prior State of the Equipment Finance Industry (SEFI) reports and the Foundation’s market sizing study,” said Jeffry D. Elliott, Foundation Chairman and Senior Managing Director of Huntington Equipment Finance. “In addition to summarizing key industry performance data, this new format offers invaluable forward-looking economic and market insights from industry leaders and Foundation researchers.”

Highlights from the 2018 report include:

• According to the end-user survey (which focused only on private sector investment), the most common payment method used by businesses to acquire equipment and software in 2017 was leasing (48%), followed by lines of credit (9%) and secured loans (8%). Among non-financed acquisitions, cash (23%) was the most prevalent payment method, followed by paid- in-full credit card purchases (10%) and “other” (2%).
• Nearly 6 in 10 businesses use financing for acquisitions. 58% of respondents who acquired equipment or software in 2017 used at least one form of financing to do so (i.e., lease, secure loan, or line of credit). While this result is lower than the Foundation’s 2016 estimate (78%), the decline may be a result of the rise in interest rates that has increased the cost of borrowing.
• Propensity to finance remains stable. More than twice as many respondents expect their equipment and software acquisitions to increase vs. decrease over the next 12 months, though the majority of respondents expect equipment and software acquisition to stay the same (59%). Of the respondents who expect acquisitions to increase, 59% of respondents expect to use a financing method — suggesting that the propensity to finance is relatively stable.
• New business volume expanded by a healthy 6.9% for the overall equipment finance industry in 2017 according to the annual Survey of Equipment Finance Activity (SEFA), a significant improvement over 2016’s 2.5% increase.
• Based on SEFA data, both yield and cost of funds rose in 2017, while average spreads compressed for the fourth consecutive year. Although there is evidence of compression across business types, the effect was most pronounced for independents and captives, for whom spreads fell by 29 basis points and 21 basis points, respectively, on a weighted-average basis. Meanwhile, the industry continues to demonstrate discipline with respect to risky lending and deal structures, as portfolio performance remained healthy in 2017 across various metrics and types of lenders.
• Although the U.S. business cycle is nearly a decade old and the economy is approaching the longest period of growth on record, most economic indicators that have historically provided an early warning sign of a downturn suggest that the current expansion likely still has some room to run.
• Advances in computing technology, including AI and machine learning, will pose challenges for the equipment finance industry, particularly for management.