A company’s ability to move quickly can be a godsend in any economy. For independent equipment finance firms, agility is not just an advantage; it’s a birthright.
A report released earlier this year by the Equipment Leasing & Finance Foundation (“Independents: Banking on the Non-Banks”) observed that while the future generally looked positive for experienced independents, a number of conceivable situations could undermine their success. These included reduced funding by banks, risk management focused on the short term, and conditions that further tighten the squeeze on spreads. To follow up, EL&F magazine interviewed members from independent equipment finance companies to produce a snapshot look at the state of the sector now. Here’s what we found:Ask about the challenges currently throwing rocks in the path of independent equipment finance companies in mid-2019 and Bob Neagle of Ascentium Capital easily lists several:
- Surging competition, and the slew of strategies and tools needed to stay ahead of it
- Maintaining disciplined risk management as newer players and others slacken their credit boxes or loosen terms
- Maintaining diversity in types of equipment financed and ensuring your company has done all it can to reduce susceptibility during an economic downturn.
"To be successful, independents have to be responsive and flexible, responding in customized ways to market opportunities.”
— Bob Neagle, Ascentium CapitalNeagle, President of Merchant Finance at the Rochelle Park, New Jersey-based company, says such traits are key qualities that set independents apart. “To be successful, independents have to be responsive—reflected in speed—and flexible, responding in customized ways to market opportunities,” he says. To do that, he thinks companies need a degree of specialization to avoid offering a commoditized product, and technology that enables quick and competent performance in an environment flush with alternative competitors as well as traditional ones. “If you have those things, along with a culture that inspires people to work inside your business model as a team, you have an opportunity to win customers and keep them,” he says.
“Regulatory compliance has made it difficult for banks to do business with small and mid-size businesses… That’s created an opportunity for independents.”
— Don Hansen, Regents Capital CorporationDon Hansen, CEO of Regents Capital Corporation, a five-year-old, Costa Mesa, California-based generalist that’s growing quickly, believes the qualities that breed successful independents are unchanging. “Most independent companies still contain an entrepreneurial vein that brings an intensity and energy to the marketplace that naturally attracts customers,” he says. Although a spate of acquisitions after the last recession reduced the number of Independents in the marketplace, “It created lots of room for the rest of us,” says Hansen. “And as we continue to be a spirit of innovation in the industry, that will only produce enhanced results for those of us that stick to our guns and continue developing solutions that are more responsive to customer needs.”
Technology as Fundamental
But even the best entrepreneur needs well-crafted ideas and proper tools to implement them. Brian Eschmann, President of Trans Lease, Inc., in Denver and Chair of ELFA’s Independent Middle Market Steering Committee (IMM BCSC), says the transportation lessor is leveraging technology across the board to improve lead generation, receive applications and enhance work flow, including credit adjudication and document flow. “Our business is centered on relationships, but we see technology as a way to compliment knowing our customers,” he says. “We’ve been pleased with our ability to leverage technology and process improvements to achieve our desired growth without significant increases to operating expenses.”Meanwhile, Sertant Capital, LLC, of Newport Beach, California, is using technology to diversify its offerings beyond equipment financing. President and CEO Dan Krajewski, who is also a member of the IMM BCSC, explains:
“We’re primarily involved in structured finance, but we’ve also expanded our capabilities by entering several markets, including the App-Only sector and the transportation industry. Our goal is to provide a multi-dimensional platform that offers several financing options, all enhanced by some level of technological support. That can be technology that can enhance processes or be used in products that offer analytical tools for end-users.”
Regents Capital has found another way to get to decision-makers. IMM BCSC member Hansen says a robust suite of solutions accelerates the company’s ability to reach prospects quickly, determine need and create engagement. “We’re using a focused, targeted approach with messaging and technology to penetrate all the noise they get,” he says. “In some instances, we use a straight effort from the sales team to create personal engagement. But our technology always accelerates the process to get to right person quicker, and our ability to engage quickly has also been enhanced.”
Neagle says that since its 2011 founding, Ascentium Capital has had as its objective the building of proprietary technology to serve vendors with finance programs suited for the modern era. Current examples include application-only financing up to $250,000, with most decisions in two hours or less, and low- to no-touch integration of marketing and decisioning tools with vendor partners to produce a unique client experience.
“We have a large team of people who do nothing but build technology and continually upgrade it and respond to the needs of clients who use it,” Neagle says, noting that the investment has produced a high level of service and helped bring in billions in financing. “We offer financing to select niches where our technology is valued and we can help our partners grow their business and grow it with us,” he summarizes.
Capitalization as Strategy
Sohini Roy agrees that effective use of technology is key to independents’ success. But she believes the way independents fund themselves will become the top differentiator when the economy turns. “Independents come in three flavors: syndication-only, balance-sheet-only, and those with balance sheets who efficiently sell some of their transactions,” says Roy, CFO of Nexseer Capital in Irvine, California and a member of the IMM BCSC. “Where you are on that menu determines your credit mobility and how a recession will impact you. The more effectively a company can move up and down the credit spectrum to find and fund business, the more it can withstand fluctuations in the economy.”
“The more effectively a company can move up and down the credit spectrum to find and fund business, the more it can withstand fluctuations in the economy.”
— Sohini Roy, Nexseer CapitalNexseer operates in the $1-million to $5-million ticket space, is agnostic to collateral type and specializes in structured finance solutions for what Roy says are “typically very bankable credits.” The company will also do deals up to $100 million that it can organize and keep part of the exposure for while selling the rest. “We don’t compromise on credit,” she says. “People come to us because few financial institutions have structuring expertise. A bank might contract with a structurer to do a $200-million deal, but for something smaller, it wouldn’t be worth it. So we take the exposure and sort through it, and since we’re interested in sharing the risk, we hold some of it in our own balance sheet and syndicate the rest. It’s an operative way for us to grow our own balance sheet while simultaneously partnering with other financial institutions.”
Roy won’t speculate about the overall effects on independents once a downturn occurs. “But a driving factor will be the shape of companies,” she says. “I think what happens will depend on whether or not companies have balance sheets and deep capital markets expertise.”
“The electronification of so many parts of our industry has made it a target for crimes committed remotely.”
— Brian Eschmann, Trans LeaseKrajewski views the situation with more shades of gray. “In both the credit and residual markets, we see some tightening on both ends,” he says. “We believe this gives us more opportunities to provide structured capital to companies that may have been on the cusp of approvable, but are now no longer bankable as Tier 1 credits. And since we work in a multi-funder environment with a number of sources as syndication partners, we’re still able to place transactional business in a more difficult environment.”
Market Approaches
Eschmann thinks market discipline will play a large role as the economy downshifts. “There seems to be opportunity for those who don’t make mistakes before the next downturn to increase and grow their market share,” he observes. “Many of the newer players who’ve stretched their credit box or are bank-owned are likely to find that their appetite changes as soon as they start to experience losses.” Not only do such companies usually leave the market quickly, he says, “They also take their time getting back in.”
Ten “Rules” for Long-term Success for Independents
- Start with the customer needs: Independents can continue to thrive as long as there are unique problems to solve.
- Pick the right spots: Avoid commodity business (pricing disadvantage and no relationship value).
- Develop and exploit expertise in industry niches or financial structuring.
- Revisit niches regularly to avoid concentration risk.
- Focus on solving unique problems that provide clear value.
- Pay for success.
- Manage funding sources: Avoid liquidity risk.
- Link risk management groups and sales staff as a collegial team.
- Build a positive culture without silos.
- Maintain management discipline but also be opportunistic.
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Hansen believes this has already happened to an extent. “Customers tell me they just want to finance a piece of equipment, and their bank wants them to go buy a warehouse or something,” he says. “Regulatory compliance has made it difficult for banks to do business with small and mid-size businesses, particularly for stand-alone transactions. That’s created an opportunity for independents, because we now see customers who want a very standard finance solution delivered to them without a lot of headaches, and their options have become limited.” Meanwhile, Regent Capital’s strategy is full steam ahead until erosion in credit or the company’s portfolio signals trouble, he says.
Neagle says Ascentium Capital expands into markets complementing the company’s business model as a way to address competition. The company entered the point-of-sale space in 2016 and, more recently, commercial-vehicle finance. But unless a firm has a value proposition that differentiates it from competitors, Neagle thinks widening the credit box to chase volume could result. “If you have a value proposition that differentiates you and a strong risk management culture like we do, you’ll look for markets that continue to meet the risk profile for markets you’re currently in, and expect to be in in the future,” he says.
Fending Off Fraud
But the focus on growth and opportunity can only continue as long as the fight against fraud is unflagging. Phishing has become so common at some companies that it’s encountered almost daily. “It’s relentless,” says Hansen. “We had several scenarios come through that we caught, emails giving fake wiring instructions, directed not only to us but to our customers. We had to adjust our business processes and institute fraud training for our new hires, because some of the emails are really deceptive and can be pretty enticing.”Eschmann says that while exposure to fraud at Trans Lease has been limited, the company has seen it. “The electronification of so many parts of our industry has made it a target for crimes committed remotely,” he says. “Fraudulent applications, phishing and attempts to falsify payment instructions are on the rise, but I think most lenders are taking aggressive measures to combat these potential threats.”
Roy observes that members of ELFA’s Independent Middle Market Business Council Steering Committee are reporting “a greater need for fraud awareness,” which they believe could be met with more—and sometimes new—internal controls and training.
“Independents are still nimble… It really is a great time to be an independent.”
— Dan Krajewski, Sertant CapitalInternet fraud at Sertant Capital has not yet become a problem. But Krajewski thinks that could change as the company increases its penetration in the application-only market place. More pressing, he says, is acquiring the right talent to fuel expansion in a full employment market. “[But] we’re seeing some softening on this issue, and the number of people seeking employment changes seems to be increasing,” he says.
Besides, challenges don’t dampen Krajewski’s outlook. “Independents are still nimble,” he concludes. “We have the ability to think outside the box, we’re entrepreneurial in spirit, and as we see changes in the economic environment, I know we will have more opportunity than less. It really is a great time to be an independent.”
Eschmann goes a step further. “I think any time is a good time to be an independent,” he says. “We’re afforded the opportunity to be entrepreneurs, to make decisions to the extent we have the balance sheet, expertise and enthusiasm to do it. We’re not free to do anything we want, but we can take advantage of trends and move quickly. We’re in the business—and we never left.”
If that’s not flexible flying, what is?
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2019