30 Jan The future of equipment finance.
Author: Chris Pyne
As seen in Australian Earthmoving Magazine
The equipment financing market is one of those industries you rarely hear about, yet it is also one of the largest in the world with over US$1 trillion in market value. Of that, around 70% is financed, with third party companies providing businesses with the capital to buy or lease equipment.
Historically, equipment finance worked like this: if you needed funds to purchase new commercial washers for your dry cleaning business, or an industrial boiler for your cement factory, or even just a company car, you spoke to your bank. They would assess your application and give you a loan to purchase the equipment you needed.
Then in 2008 as the US experienced their sub-prime mortgage crisis and ploughed into a major recession, banks worldwide became more risk-averse. Businesses of all sizes were required to demonstrate a solid credit history and jump through several hoops to get finance. This left many smaller businesses with little option but to sell off assets to meet repayments and without equipment, eventually cease trading.
The equipment leasing and finance market today
Fast forward more than a decade, and funding is once again easier to come by. According to the 2019 Equipment Leasing & Finance U.S. Economic Outlook report produced by the Equipment Leasing and Finance Association (ELFA), “Equipment leasing and finance will remain the most common payment method used by businesses to acquire equipment and software.The propensity of businesses to finance will continue despite rising interest rates, lower tax rates and a strong economy that’s resulted in many companies with cash on hand.”
There’s no disputing credit offers a number of advantages. While some business owners will continue to dip into their working capital to make purchases, others find business equipment and vehicle financing a better alternative. Using credit creates greater flexibility and enhanced purchasing power by creating a complement to cash on hand. For many companies, there is appeal in limiting the use of cash for regular operational expenses such as rent and payroll, while relying on finance for bigger asset acquisitions.
The ELFA report also mentions rapid technological advancements that are creating a shift in asset values and competition in the new and used equipment markets. Technology today not only provides asset managers with greater visibility over equipment failure and lifespan, it can also assist senior operational staff to predict surges in market demand and pricing to maximise growth opportunities. Savvy managers can use this information to make smarter business decisions, and work with a finance provider familiar with their industry to negotiate terms and conditions that meet their strategic business objectives.
According to the Australian Bureau of Statistics, equipment financing and leasing facilitates about 40 percent of total capital expenditure for Australian enterprises, including replacement of existing assets and purchase of new assets. This represents a significant proportion of total business borrowing for small businesses in particular.
The Fintech revolution
The term Fintech (financial technology) originally referred to computer technology applied in the back office of banks or trading firms, but is now used to describe everything from transferring funds using your smartphone to applying for credit. It seeks to automate and improve delivery and access to financial services, and is rapidly transforming the financial services sector as we know it.
Before Fintech, a new business owner would have gone to a bank to secure startup capital. If they intended to accept credit card payments they would then have had to establish a relationship with a credit provider and install necessary infrastructure, such as a landline-connected card reader. With wider availability of enhanced mobile and ecommerce technology and new mPOS products such as paypal, Stripe, and Square, those hurdles are a thing of the past.
For smaller businesses, Fintech solutions will make equipment leasing and financing simpler, faster and more transparent than ever before. Fintechs effectively access your bank statements and use algorithms to determine how much you can borrow, making unsecured business lending more readily accessible.
According to Matt Thompson, Business Development Manager at Connective Broker Services, “Small and medium businesses are changing so rapidly that financials are basically irrelevant. Funders want to know how a client is performing right now, not 6-18 months ago.”
The future of equipment finance
Looking ahead, we are seeing the dawn of a Fintech revolution whereby data is used to understand a customer’s financial obligations and assess their ability to repay. This means customers will have access to more flexible and diverse customised solutions based on cashflow rather than collateral. This will create a shift away from the need for significant wealth or assets to obtain a loan, as well as being more accessible in areas previously unsupported.
This era of change for financiers affects everyone from mum and dad borrowers – with Australian house prices becoming less and less affordable, and asset-backed borrowing being less realistic – to major heavy industries like mining that are looking for ways to reduce operational costs and keep shareholders happy.
Traditionally, asset purchases consisted of an equipment manufacturer supplying a machine and potentially after-market services to a business that would use that asset until it failed and needed replacing. More recently, business customers are looking for a partner that can provide a solution to their equipment needs for the duration they require.
The digitisation of asset finance is effectively redesigning the buying process while new technologically advanced products will likely pave the way for a different future for business operations.
As we are seeing more conventional lenders offering historically low rates in Australia, it is an ideal time to establish a relationship with a broker who has their finger on the pulse with regard to market change. Partnering with the right provider can mean the difference for your business – helping you to achieve very agreeable terms and get ahead of the game.