ELFA - Equipment Leasing and Finance Association - Equipping Business for Success
Equipment Leasing & Finance

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State of Funding 2024

In a dynamic market, numerous factors come into play.

There was the funding market
before the Silicon Valley Bank/Signature Bank crisis last March, and then there was the funding market afterward.

Following a post-pandemic infusion of liquidity, the funding market had already downshifted at the beginning of 2023, feeling the impact of rising interest rates. After March, it applied the brakes, particularly in the banking sector.

“Over the last 40 years, for most institutions in equipment finance and leasing, deposits were never a topic of conversation,” says Tom Pagano, Senior Vice President - Capital Markets Leader, Customers Commercial Finance. “It was always just find a deal, book it and put the assets on the books.”

Following the failures of both banks—the first since 2008—and the FDIC’s subsequent rescue, strategies changed.

Facing bank regulators’ desire to see a repositioning of balance sheets that reflected better loan-to-deposit ratios, banks slowed down originations and increased their spread, Pagano says. Banks worried less about volume and more about credit quality and profitability.

“Now deposits are gold,” Pagano says. “In order to do new deals, many times you need to get deposits with them.”

“More folks are focused on return versus growth, which hasn’t been the case in the past.”

—Leif Grundahl, Wells Fargo Equipment Finance


Deposits trump growth

“At banks, the focus has shifted from loan growth to growing low-cost deposits,” agrees Robert Boyer, President, First Commonwealth Equipment Finance and the 2024 ELFA Board Chair. “There are a lot of dynamics affecting the market.”

“Starting about midway [through] last year, the secondary market has been volatile,” says Leif Grundahl, Syndication Manager, Wells Fargo Equipment Finance. “Institutions are looking for better returns and more credit spread. Many have had to increase their cost of funds, particularly on longer-term deals.”


This, in turn, has driven some behavior. “More folks are focused on return versus growth, which hasn’t been the case in the past,” Grundahl says. “Some have had liquidity issues, and haven’t been participating in the secondary market, and now that they’re coming back are being pretty strategic on where they deploy their capital.”

Capital markets mostly buy transactions from other banks, so when there are constraints many times the first reaction is to pull back on secondary markets, opting to use capital for customers and vendor programs, Pagano says.

“It affected the whole capital markets industry last year,” Pagano says. “There were more sellers and not enough buyers, where in previous years the opposite was true. The pendulum swung, and everyone became more of a seller than a buyer. It’s probably going to continue this year as well.”

“There’s not another event in our industry that allows you to have access to that many business partners at one place and at one time.”

—Robert Boyer, First Commonwealth Equipment Finance


Some institutions are concentrated on return-on-equity models, while others are fixed on actual yield or loan coupons, according to Grundahl. Whatever the strategy, “people are hyper-focused on returns this year,” he says.

All of this reflects the down slope of a roller coaster that banks have ridden for the past three years. At first flush with stimulus money, banks searched for ways to increase loans and investments.


“Now here we are a couple of years later dealing with the opposite issue,” Boyer says. “Loan-to-deposit ratios in a lot of banks that compete in our space are starting to see stress. If you’re a bank-owned equipment finance company, you’re providing a superior rate of return, but when there’s limited capital to go around within that bank, they’re going to save their capital for their relationship business. There’s potentially a reduction of funding availability at the equipment finance level.”

But there are positives, says Sera Oliver, Director - Capital Markets, Key Equipment Finance.

“While we’re in a much better place now than for most of last year, finding capital for middle market opportunities is still challenging.”

—Sera Oliver, Key Equipment Finance


“As 2024 began,” Oliver says, “we saw the funding arena beginning to open again. It’s certainly a different environment than we saw in the second half of 2023. While a few investors have decided to sit out this year, most are open for business and actively seeking funding opportunities.”

She continues: “While we’re in a much better place now than for most of last year, finding capital for middle market opportunities is still challenging. Yes, investors are open for business, but they are also being conservative in how they invest. They are going upmarket on credit, continuing to require higher spreads on those investment grade and upper middle market deals.”

ELFA Launches New Funding Source Database

Funding Database Icon_blueJust in time for the 2024 Funding Conference, ELFA has unveiled a new Funding Source Database to serve industry leaders. This online tool is designed for both those seeking funding and those looking to buy transactions. Search by type of company, type of lease structure, funding programs, equipment type and credit criteria.

What about captives and independents?

Since banks make up around 63% of the new business volume in the equipment finance industry, what happens in this sector can leave a deep imprint, which means captives and especially independents may be impacted.

“Independents are reliant on their own banking relationships, so they may not be immune to the issues going on in the banking community,” says Bruce Winter, President of FSG Capital.

“There are few independents that are completely funded with their own capital and don’t look to outside funding institutions in some way,” Winter says. “We’re just going to have to see if they’re going to be challenged by their banks pulling in the reins somewhat.”

On the other hand, banking issues may positively affect independents and captives, Boyer says. “To some extent, less competition might allow for independents to get the rates they want. But banks also provide them lines of credits, and if they tighten up on those, it could impact an independent’s liquidity,” he says.

“The independents that have relationships with insurance companies and other long-term funders are going to be in better shape,” Winter says.

“I think a lot of borrowers are going to be quite surprised that their traditional, inexpensive lending source is not aggressively chasing their business, and they’re going to have to seek funding elsewhere.”

—Bruce Winter, FSG Capital


Surprised borrowers?

“I think a lot of borrowers are going to be quite surprised that their traditional, inexpensive lending source is not aggressively chasing their business, and they’re going to have to seek funding elsewhere,” Winter says. He adds that “the prime rate increasing by 500 points should have had a significant impact on borrowing and it really hasn’t to date, but it can kick in.”

And credit standards are starting to tighten, Boyer says. “A lot of equipment finance companies saw margins compressed significantly when the Fed increased rates,” he says. “The cost of funds went up but the rates that we were able to charge in the marketplace did not go up correspondingly. Replacing higher yielding run-off with low-margin originations in 2023 created a bubble of lower profitability that’s going to be a lingering issue for many companies in 2024.”

One possibility: An interest rate decline

“Interest rates are definitely at the forefront of people’s minds,” Grundahl says. Depending on economic conditions, many are expecting the Federal Reserve Bank to reduce rates by the third or fourth quarter of this year.

“The hope is that it helps alleviate some of the inverted yield curves that we experienced in the past few years,” Grundahl says. “We all would like to see some normalcy in the interest rate environment, and some are optimistic that it will happen in the back half of 2024.”


If rates do decrease, “it will help with internal cost of funds,” Grundahl says. “A lot of borrowers might not be seeking capex loans because of elevated interest rates, waiting to see if they come down. As interest rates come down, capex activity might pick up.”

“The market is now back to funding, and interest rates are expected to begin normalizing,” Oliver says. “A lower rate environment means lower deposit costs and swaps/securities portfolios are less under-water, which bodes well for earnings. We’re also seeing stock price increases–a telltale sign that banks are viewed more favorably.”

Winter urges perspective. “Even at current rates, this is not a punitive rate environment,” he maintains. While it may feel painful compared to two years ago, “it’s certainly not a horrible situation.” And with the Fed favoring a soft-landing approach “they will be quick to lower it as they have data to support it. I don’t see rates ever going back to the super low rates that we saw,” Winter adds.

If interest rates go down as expected, and lenders can maintain current rates, then lenders should be able to recover some margin at a “level that makes sense for the business models we have,” Boyer says.

“We’re starting to see some banks moving toward being more of a product for bankers than being a leasing company.”

—Tom Pagano, Customers Commercial Finance


Markets to watch

When asked about which markets are a concern, the answer from our experts was almost unanimous: transportation.

“Transportation and trucking are in for a big shake-up,” Winter says. “We’re already seeing it.”

“We’re very careful and cautious about trucking right now,” Pagano adds.

Another concern is the impact of bad commercial real estate loans, which are starting to kick in, Winter says. “That could further strain the capital base of some banks.”

“The middle market space is tightening,” Oliver says. ”Investors are still hungry for the investment grade business, and there are many investors interested in the higher yielding transactions (B+ to CCC+ market). The higher risk/higher rate market used to be severely underserved, which is no longer the case, as the market has many new entrants.”

Markets that still hold promise include renewable energy, primarily because of governmental backing. “More companies in our space are developing a strategy for the green energy push,” Boyer says.

What will 2024 bring?

“We’re starting to see some banks moving toward being more of a product for bankers than being a leasing company,” Pagano says. “Rather than having their own leasing company, they will be just a product for the banker. The banker will bring in leasing when their customer wants leasing, as opposed to being a leasing company generating its own business. We’re seeing some of the banks already moving in that direction.”


“Fortunately for us, we were never pencils down last year,” Pagano adds. “We continued to do deals, but we were selective. Now we’re pretty much back to normal. We require deposits when we can get them but the governor on our originations has been lifted and now, we’ve been able get back to 2020-to-2022 volume trajectory.”

“As we hit these challenging times, there’s little doubt in my mind that we’re going to see some creative solutions,” Winter says. “I’m confident that the strong entrepreneurship we’ve seen forever in the equipment financing and leasing segment is going to rise again.”


Funding Conference: One-stop relationship building

The value of attending the ELFA National Funding Conference comes down to just one word, says Robert Boyer: Efficiency.

“There’s not another event in our industry that allows you to have access to that many business partners at one place and at one time,” Boyer says. “Everyone who’s a player in this space attends this event. And it’s especially important this year when so much change is going on.”

This year’s conference takes place April 16-18 at the Hilton Palmer House in Chicago.

“Most people have seen some disruption in funding in the last couple of months,” Bruce Winter says. “So where do you find new funding? There’s going to be a lot of people in the room in Chicago, and it’s a wonderful place to strike up some new relationships.”

Conversations range from rates to credit quality to lending parameters. “People call it speed dating because you’re going from one meeting to the next,” Tom Pagano says with a laugh. Attendees will be able to formally meet with each other either in a booth on the conference floor or in suites.

“It’s the best conference for the capital markets segment because you’re bringing buyers and sellers together,” Pagano says. “There’s usually around 600 people at the conference and it’s well attended by all segments.”

“We’re setting up meetings back-to-back-to-back, and it’s a great opportunity to get your finger on the pulse of the equipment finance industry and what the capital markets activity looks like,” Leif Grundahl says.

“You may meet people that maybe you wouldn’t normally have met and uncover a strategic piece that they offer,” Grundahl continues. “It’s just a condensed opportunity to meet as many people in the industry as you can handle.”


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