State of Business: Great Expectations

ELFA members are still riding a wave of economic optimism and brisk new business. The association’s latest Beige Book, a quarterly survey of four of the organization’s Business Council Steering Committees (BCSCs)—captive and vendor finance firms, financial institutions, independent middle market companies and small ticket firms—showed 77% of respondents seeing a rise in new business volume, with just 9% reporting a decline. Members of two BCSCs—captive and vendor finance firms and small ticket firms—had no members at all reporting a decline in new business.

“We’re seeing a high amount of liquidity in the market—a lot of money looking for deals, a lot of new entrants to the market. There’s definitely demand, confidence is very high and that’s driving behaviors in the small business sector specifically,” says David Normandin, Chair of the Small Ticket BCSC and Managing Director of the Commercial Finance Group at Irvine, California-based Hanmi Bank. He says business has been more robust this summer than most in his sector expected.

“There’s definitely demand, confidence is very high and that’s driving behaviors in the small business sector specifically.”

—David Normandin, Hanmi Bank






Normandin and the Chairs of the three other BCSCs remain optimistic. However, various issues ranging from rising interest rates to the new tax law and tariffs present challenges and issues to be watched. The Chairs shared their insights about the second quarter 2018 Beige Book data, feedback from their sectors and the outlook for the industry.

Strong Business—And Strong Competition

Overall, in addition to the strong new business report, the Beige Book data held few surprises. The state of credit quality, delinquencies and charge-offs are stable, but even a few upticks don’t worry the BCSC Chairs because such negatives are still near historic lows. Normandin describes the overall outlook as “cautiously optimistic.”

“As I talk to customers, they don’t say, ‘Hey, it’s because of tax reform that I’m buying,’ but it has done a lot of good things in the broader economy to encourage spending.”

—Brian Eschmann, Trans Lease, Inc.





“We see delinquency stable over the last year-and-a-half. We had a little uptick last year in the second quarter, but literally this year it has been rock solid. And portfolio performance as measured by net bad debt and charge offs has been consistent and consistently low,” he says.

But those good customers also have their pick of companies who are trying to serve them. Competition for new business is fierce, says Brian Eschmann, Chair of the Independent Middle Market BCSC and President of Trans Lease, Inc. in Denver, Colorado.

“Many of those I talk to that are losing deals or not hitting some of their goals say it’s due to pricing and competition right now. The opportunities are there, but so are the players trying to win that business,” he says.

Niches Have Benefits and Drawbacks

One way to develop an advantage over the competition is to develop a deep specialization in a market or type of financing. That’s essentially the business model of the Captive and Vendor Finance BCSC members. Chair Andrew Blacklock, who is Senior Director of Strategy and Business Operations at Cisco Systems Capital Corporation in San Jose, California, says business has been strong across all sectors.

“We have commercial-, enterprise-, service provider- and public sector-focused lines of business. It was a very solid year in all four of these sectors. As a captive of an original equipment manufacturer, we rise and fall a bit with how the parent is doing, and Cisco had a fantastic year,” Blacklock says.


In agriculture the story was different. Michael Romanowski, Chair of the Financial Institutions BCSC and President of Minneapolis, Minnesota-based Farm Credit Leasing Services Corporation, which specializes in agriculture and rural infrastructure, was one of the respondents who saw a decline year-over-year. Low commodity prices almost across the board were among the factors that slowed the sector, he says.

“Certainly, corn and soybeans are down. Dairy prices are depressed. Even some of our stronger performers in the past few years, such as the nut industry, are off this year,” Romanowski says.

Indeed, agriculture was reported as a lagging sector by three of the four BCSCs. Other slow performers included printing, mining/oil and gas extraction, telecommunications, wholesale/retail and a handful of others. Top performers included construction, health services, industrial/manufacturing and others. Finance was ranked as both a top performer and a laggard by different BCSCs.

Markets respond to specific concerns, creating opportunity. Blacklock is seeing significant investment in internet security and protecting network infrastructure.

“We’re seeing a substantial amount of demand for financing from customers looking to purchase networking equipment and security software to help them meet their business objectives. One of the things that’s really driving that growth is the desire for companies to have secure networks,” he says.

“When I talk to my colleagues, there is a real focus on the rising interest rates and whether they will slow down the appetite for financing.”

—Andrew Blacklock, Cisco Systems Capital Corporation

External Factors Affecting Business

A number of macroeconomic factors have the BCSC Chairs and members keeping a watchful eye on the horizon. They primarily boil down to taxes, tariffs and interest rates.

The new tax law and its corporate tax cut is expected to provide a windfall for many businesses. However, it’s hard to tell if they’re spending that money yet. “We believe that tax reform, as a whole, has stimulated some positive business investment and overall consumer confidence that has prompted general GDP growth, which has been good for our business,” Eschmann says. “As I talk to customers, they don’t say, ‘Hey, it’s because of tax reform that I’m buying,’ but it has done a lot of good things in the broader economy to encourage spending.” As more businesses look at their end-of-year spending and tax planning, Eschmann says he believes the tax cut will drive more spending.

“Some of our customers are holding off on capital investment until they have a clearer lens into the markets where they sell their products.”

—Michael Romanowski, Farm Credit Leasing Services Corporation






Talk of tariffs is worrisome to some sectors. “At the beginning of the year, predictions were that the overall equipment finance industry would be up 9% on a year-over-year basis, and we just haven’t seen that. Some of our customers are holding off on capital investment until they have a clearer lens into the markets where they sell their products,” Romanowski says.

Rising interest rates in an environment where spreads are already tight also give some BCSC Chairs pause. Blacklock says his team is watching those elements closely, especially as interest rates continue to rise. “At some point we have to pass those on to customers. When I talk to my colleagues, there is a real focus on the rising interest rates and whether they will slow down the appetite for financing,” he says.

But Normandin also emphasizes that none of these factors is an immediate threat to the broader industry. “There is so much rhetoric in the market. Everyone has an angle and view. We try to take an even-keel approach. We look at what’s going on in the news cycle and really focus on how that’s affecting our customers and our business before we’ll make changes, whether it be to our models or to the types of industries that we’ll work in or get out of,” he says. For now, he and many others in the industry are enjoying the confidence that is spurring business.