Equipment Finance (or leasing) continues its evolution. It was not long ago anyone anywhere could ‘lease’ equipment. Then the bubble burst. Equipment brokers and leasing companies went out of business even more rapidly than the small businesses they helped finance. Issues were 3 fold:
Cash Flow: Leasing companies were inundated with companies not able to pay. Restaurants who were notorious for being high risk led the way but small business was right on its heels. Leasing companies tried to resell or lease the equipment but the cash required to repossess, hold, and resell was too much. Margins shrunk as competition increased. The room for error became too small to absorb a downturn. Life was good so the money was spent on increasing business just like everyone else with no regard to a drop in the economy.
Collateral: When the companies took back the collateral it had to get rid of it. The problem was that too much used equipment hit the market driving down the price. Leasing companies now not only lost cash from lack of payment but from the loss by liquidation of collateral.
Credit: If someone could breathe then they could get lease. When you were turned down by the bank all you had to do was lease the equipment. Just have a compelling story and you were good to go.
The Rebound: Leasing is back. Small and large companies are back in the market. Today leasing faces some of the old challenges and risks but with a keener eye toward the issues above. Pricing of the lease has improved cash flow by increased rates for the greater risk in the transaction. Collateral is evaluated for current market prices but is still a real risk if an additional correction happens. Credit is more closely evaluated. A story can be old but you also need the credit or collateral to back it up. No longer can you go tell a story and get the equipment. It is still a lot easier to lease equipment to grow your business. Seems simple but we all were glossy eyed with the great economy and leasing companies were not excluded.
Hyak Financial is a commercial mortgage broker with over 50 years of banking and finance experience. Contact us to learn more about our products and services. If you have a commercial mortgage scenario that you would like our feedback on, simply complete our online scenario form and we will get back to you promptly.