What products and trends are emerging in the equipment finance sector? A session at the ELFA/IMN Investors Conference last month examined this question and offered insights into current industry developments.

The session “New Products and Trends Emerging in Our Sector,” was designed to educate investors on an array of trends in the equipment finance industry. Below are just three highlights from the session, which was moderated by Barbara Goodstein of Mayer Brown LLP, with panelists Ed Tamiso of Standard & Poor’s Ratings Services, Dave Gilbert of National Funding, Joe Franco of Genpact and Christian Haesslein from DZ Bank:

Trend #1: More commercial finance companies are issuing ABS for the first time.

Ed Tamiso, an analyst at Standard & Poor’s Ratings Services, said that in the past three years there have been more entrants to the term ABS market. The growth in newer issuers is typically correlated with the growth of the equipment finance market, he noted, adding that securitizations from newer entrants were “virtually nonexistent” during the 2008-2010 period.

Tamiso said the new ABS market entrants range from brand-new to more established finance companies that are seeking funding through the securitization market for the first time. In evaluating securitizations, especially from newer entrants, S&P considers a range of factors, including but not limited to the company’s management track record, corporate governance, ownership goals, the complexity of their business models, and the quality of their data.

Tamiso also noted that there have been some cases where S&P did not assign its highest triple-A rating in securitizations from newer issuers. This is due to a variety of factors, such as the company having a short or limited track record, limited funding diversity or a complex business model. He added that prior to the financial crisis, bond insurers were more active in this market and provided insurance policies to the most senior securities in these transactions.

(L-R) Panelists Tamiso, Gilbert, Franco, Haesslein and Goodstein.

Trend #2: Alternative lending sources are filling a small-business funding niche.

Dave Gilbert of National Funding discussed the growth of alternative lenders offering nontraditional sources of working capital for small businesses.

“A lot of these alternative lenders are starting to finance customers who are buying equipment,” he reported. “Instead of doing an equipment lease, they’re obtaining short-term working capital loans to buy the equipment.”

The Great Recession helped to spur the growth of this different kind of funding. “Instead of a three-to-five-year lease payment, a lot of these alternative lenders are financing customers over six to 12 months,” said Gilbert. “Ever since the credit crunch of 2008, a lot of business owners would rather take out higher-rate, short-term debt, so at least they know it’s paid off, rather than have a five-year fixed payment.”

He noted that the alternative funding industry is growing quickly, and estimated that for every 100 of these working capital deals being funded, 30% are being used to acquire equipment.

Some of the nontraditional products Gilbert touched on during the session included merchant cash advances, which allow for the purchase of future credit card receivables, short-term business loans, which can be used to finance temporary working capital needs, and peer-to-peer funding, which connects borrowers and lenders online.

Gilbert said some equipment leasing and finance companies are offering alternative funding products, noting that his own company offers both leases and daily payment loans.

(L-R) Franco, Haesslein and Goodstein.

Trend #3: Technology has “invaded” the equipment finance space, becoming a major competitive advantage.

Joe Franco of Genpact highlighted several areas in which technology is driving greater efficiency and customer service.

Franco reported that an increasing number of equipment finance companies are building web portals specific to their vendor dealers and connecting the portals to their current customer-relationship-management and back-office solutions. This is allowing dealers to have more efficient connectivity with the equipment finance company.  

Business process outsourcing is another growing trend, Franco noted.  For example, companies are outsourcing their accounts payable, or having third parties automate their document creation process. Others are automating their entire originations packaging process, even to the point of having ratio analysis done and having the packet prepared for their underwriters to review. Business process outsourcing is being considered as a cost-saving opportunity for non customer facing activities, and is also allowing for more efficient international expansion at some equipment finance companies.

Self-service mobile applications are also on the rise, said Franco, allowing sales teams in the field to meet end-user customers and input data on-site using mobile tools such as tablets.

Finally, business process re-engineering is growing in popularity.  Franco said equipment finance companies are looking to become more efficient with their existing IT systems, and updating or buying new systems to take advantage of the latest technology, allowing them to update their operating models and improve their efficiency, thereby achieving greater profitability.

Session moderator Barbara Goodstein of Mayer Brown LLP, noted that technology is one of the biggest stories—and challenges—in recent industry developments, particularly for the small-ticket sector. “The important word right now for small-ticket is technology. Technology is invading the space. It's reshaping how small-ticket equipment leasing and finance companies do business.”

(L-R) Tamiso and Gilbert.

About the Investors Conference
The 13th Annual Investors Conference on Equipment Finance was held March 20 in New York City. The event, hosted by ELFA and the Information Management Network, was attended by some 300 equipment finance professionals, institutional investors and service providers who support the industry. View photos and check out all the sessions and speakers from the event.