Three Options to Consider for Portfolio Runoff in Equipment Leasing and Finance

by Kimberly Fumega

Kimberly Fumega Yeo is the Chief Solutions Officer for JDR Solutions, a service provider in the industry for more than 20 years. Kimberly has been in the equipment finance industry for 37 years.

As many lenders reevaluate their portfolios, Kimberly Fumega Yeo shares three options equipment leasing and finance companies can consider for portfolio runoff.

As 2024 begins, we continue to see large amounts of change in the equipment finance industry. As you adjust your priorities, you may be facing choices about what to do with your existing portfolios.

  • Have you decided to shift away from equipment financing and would rather focus on loans?
  • Are you shifting your strategic focus away from an asset class?
  • Do the software and servicing expenses of your portfolio no longer make financial sense?
  • Are there parts of your portfolio or business that you have decided to close or liquidate?

If any of the above apply to your business, it is important to assess your options so you can move forward in a successful way.

Choosing the Right Path

There are three roads to consider. Do you sell off your portfolio? Do you keep it in-house and let the contracts reach maturity? Or do you seek out a company to manage your portfolios through runoff. Let’s explore each of them.

Selling Your Portfolio

When you sell a portfolio outright, your team is relieved of day-to-day management tasks of billing, collection, customer service and IT maintenance, but you may not be maximizing the value of your book. Further, any potential to realize some of your end-of-life profit may no longer be available to you. And your relationship with your customer is eliminated.

An important consideration is the time and effort you will invest to seek out possible buyers, analyze the potential accounting and tax implications and complete due diligence to ensure the deal is structured in the most effective and desirable way.

Keep the Portfolio In-House

You can continue to service the portfolio in-house to maximize the collection of rent payments and end-of-life revenue streams. However, you will need to evaluate if this approach is cost effective over the remaining life of the portfolio. Operational expenses in labor and systems will continue. As the portfolio shrinks there will be diminishing economies of scale to your employees and systems costs.

Also, winding down the portfolio with internal resources can detract focus from new business initiatives.

Choose a Portfolio Runoff Partner

You could also consider partnering with a business process outsourcing (BPO) company to run down the portfolio for you and with you. This could provide you with several advantages:

  • Maximize the collections of the rent payments and end-of-life revenue streams
  • Get rid of the administration of the portfolio including billing, collection, customer service and IT maintenance.
  • Repurpose your resources to work on something more profitable
  • Maintain a variable and predictable cost structure that will scale down as your portfolio runs off

Finding the Right Partner

Finding the right BPO partner is critical and there are many things to consider when making your selection. Consider this as a check list of what to look for.

Trustworthy, Competent and Skilled:

  • Choose an established, reputable and recognized servicer in the equipment finance industry.
  • Their resources must have the knowledge, skill and experience to perform all the duties required to run off your portfolio.
  • They must be able to provide references for you to validate their claims.

Collections and Customer Service:

  • Choose a company with experience that matches your book of business. Collecting against a used car lease is very different than collecting against a commercial aircraft lease.
  • The BPO must have experience working with clients on resolving their issues as well as skill at maximizing the amount of money collected while controlling delinquency.
  • Experience with servicing your contract structures such as leases, loans, revolvers, floating rates, etc.
  • Able to handle the complexities of your business including complex reconciliation and special invoicing needs.

Systems, Security and Compliance:

  • The BPO must have knowledge of your lease accounting application or back-end platform for portfolio management as well as hosting capabilities.
  • Ensure they have robust data centers with in-place disaster recovery and data back-up processes and capabilities.
  • Do they have adequate environment controls that are compliant with your risk requirements such as SOC 1, SOC 2 and FDIC?
  • Cost Structure:
    • Expenses should be evaluated over the life of the runoff.
    • Is it a flat rate per month, on a per contract or per asset basis or hourly?
    • What are the terms of the agreement?

The BPO you select must have resources that will maintain your relationship with your customer by providing the same comprehensive service they received before. The partnership should be an expansion of your team with a commitment to your success.

There are many reasons why a company may consider portfolio runoff. If you are in a position where you need to weigh your options of how to handle your existing portfolio, evaluate all of your options to determine which path is best for you.

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