78% of businesses opt for finance

An increasing number of businesses made use of leasing or another form of financing when acquiring equipment in FY 2015, according to a study by the Equipment Leasing and Finance Foundation, which forecasts the US equipment finance market will grow by 1.31% to $1.03 trillion in 2016 and is on course to reach $1.24 trillion in 2020.

The research, conducted by IHS Markit, found that 78% of business relied on finance in 2015, up from 72% in the previous market study released in 2012. The survey also shows that 68% of the total value of equipment and software acquired in 2015 was financed, a significant increase from the previous estimate of 55%.

Of the total financed, 39% was leased, 16% used a secured loan, and 13% used a line of credit. This represents a major shift toward the use of leases and secured loans, which accounted for only 17% and 9% of the total value of financing in 2011, respectively. There was also a significant shift away from lines of credit, which accounted for 29% in 2012.

The share of cash purchases declined for companies of all sizes from 2011 to 2015. Low interest rates, strong competition among lenders and abundant liquidity have made financing equipment acquisitions especially attractive as lenders compete to offer the best rates to borrowers, the Foundation says.

Investment “flat”

According to the Foundation’s US Equipment Finance Market Study: 2016-2017, total public and private investment in equipment and software grew 4% in 2015, to $1.5 trillion. In 2016, equipment and software investment is expected to be relatively flat, increasing by only 0.5%.

However, due to excess liquidity and strong competition, which have driven down the cost of borrowing, finance volume is expected to outpace total investment in equipment and software. The study cites excess global capacity, low commodity prices, a strong dollar, sluggish export markets and the collapse in drilling for oil and natural gas as main factors holding back capital investment.

Growth in investment in equipment and software is expected to accelerate slightly in 2017, growing at a 3% rate. By 2020, total investment in equipment and software is expected to reach $1.8 trillion.

As in 2012 and a previous 2007 Foundation survey, the latest research confirms that larger ticket purchases are financed to a greater degree than smaller ticket items.

Banks remain primary lenders

The study shows the banks share of financing activity has decreased, accounting for 47% of financed purchases in 2015, compared to 57% in the 2012 Foundation market study, but they remain the primary lenders across all equipment types in 2015. Non-bank lenders’ share of equipment financing includes 30% for manufacturers and vendors and 16% for non-bank independent financing companies.

Banks continue to focus their new financing efforts on companies with lower risk profiles. The share of bank financing of highly profitable companies (profit greater than 20% of sales) was 43% in 2015, compared to 47% in 2011. Meanwhile the share of bank lending to unprofitable companies declined from 53% to only 26%, as less profitable companies were forced to seek alternative financing options.

Digitalization

The Foundation’s research identifies the growth of fintech companies as a major development in the equipment leasing and financing industry recently. Industry experts indicate that fintech companies have driven faster adoption of technology and have contributed to the “digitalization” of the lending process. Respondents indicated that customers are increasingly asking for managed solutions or bundled services and usage-based products.

Finally, most of the industry experts polled indicated that they expect very little impact on the demand for leasing from the introduction of new lease accounting standards in December 2018 which will require lessees to recognize assets and liabilities for leases with terms of more than 12 months. As the new standards have been under discussion for many years, executives expressed the view that firms will be prepared for the changes.

Ralph Petta, president of the Foundation and president and CEO of the Equipment Leasing and Finance Association (ELFA), said: “This invaluable research provides a comprehensive picture of the size and scope of the equipment finance sector. In so doing, the analysis reaffirms the industry as an integral component of the US economy, enabling firms—both large and small—to acquire capital assets to operate and grow their businesses.”

The US Equipment Finance Market Study: 2016-2017 is available for free download at www.leasefoundation.org/research/sefi.