US equipment finance sector to break $1 trillion barrier

The US equipment finance market is set to break through the $1 trillion barrier for the first time ever, although the outlook for next year is patchy, according to 2015 State of the Equipment Finance Industry Report released at the recent annual convention of the Equipment Leasing and Finance Association (ELFA) held this week.

The study, published by the Equipment Leasing and Finance Foundation (ELFF) and authored by Keybridge Research, predicts the equipment finance market is projected to reach $1.046 trillion in 2015.

The report says a slowly improving US economy contributed to moderate equipment and software investment growth of 6% in 2014. Against this backdrop, equipment finance new business volume grew 6.7% in 2014—still remaining above the 10-year average of 4.4%, and driving the industry size to $946 billion.

The study argues that the equipment finance industry is exhibiting stable expansion so far in 2015. Although overall investment in equipment and software has been modest over the first half of the year due to the waning replacement cycle and businesses’ continued hesitancy to expand their operations, businesses are likely to finance these investments.

“There is cautious optimism among industry participants as the equipment finance industry seems to be entering a new phase of solid albeit slower growth,” Richard Gumbrecht, ELFF chairman and chief growth officer, EverBank Commercial Finance, said.“There are a number of shifts underway, including evolving customer preferences, the growing popularity of alternative financing, volatility in global commodity markets, the prospect of rising interest rates, and new lease accounting standards that, while challenging, also present equipment finance companies with new opportunities for growth,” Gumbrecht added.

Financials look positive

ELLF’s report shows equipment finance companies maintained stellar portfolios, solid financials and improved productivity in 2014. Profitability was stable, as operating profits ticked up from 35.2% to 36.2%. Return on equity dipped, return on assets was unchanged, and earnings before taxes increased, while low interest rates kept costs low. New business volume per sales full-time equivalent employee increased nearly 4% as competition drove companies to maximize productivity and efficiency, and pursue competitive advantages.

However, the study points out that the equipment finance industry faces several unknowns, both in the US and abroad, with the capacity to present both threats and opportunities over the coming months. It says regulation is an ongoing concern, particularly for banks, while US government dysfunction, including threatened government shutdowns and debt ceiling disputes, remain threats on the horizon. Turmoil in the global economy could also hurt growth in the US and dampen business investment, although a solid labor market and strengthening housing market provide reasons for optimism.