EQUIPMENT LENDING RESURGENCE
Starts with Sales
From a lending industry standpoint, inside sales is growing for several reasons including supply and demand. The availability of experienced lending and commercial finance sales talent has been strained over the last several years. Lenders seeking to grow through hiring the conventional sales person with a “book of business” has never been more difficult. Growing new originations through an inside sales model is providing a cost-effective and available alternative that is working—and as we will see—working better than most people even realize.
Another key reason for the surge is cost and efficiency. From a pure cost standpoint and on a productivity basis, a well-run inside sales effort is an extremely cost-effective way to scale a sales force. The cost of talent and the cost of a customer sale can be a fraction of the cost of other methods when inside sales is working.
Premier Business Lending has notice the management of the sales team is also easier and more measurable in an inside sales paradigm. Managing a remote sales team has clear logistical challenges and running an inside sales team involves a much more efficient management platform and better training environment. Run right, inside sales as a strategy can be truly transformational. A manager’s ability to track key performance indicators— including calls made, call connects and talk-time—is powerful. The environment of a scaled inside sales floor provides real-time training and creates a dynamic work environment more suited to the development and retention of talent than a single remote sales person working out of a home office.
Breaking down Equipment Lending By State
The vast majority of states fall under $25 billion dollars of equipment financing. States like California, Texas and New York dramatically outstrip the rest of the country, with $104 billion, $90 billion and $53 billion dollars respectively. These same three states held the top three positions in 2011 as well, indicating the economic concentration of the market. In terms of growth, however, Alabama grew at a 9% CAGR, more than any other state between 2011 and 2016 (Figure 12). Other high growth states are Texas, Arkansas, West Virginia, and Montana. This is vastly different from the growth recorded between 2007 and 2011, where the Dakotas, West Virginia and Oregon were growing at well above the national average (Figure 12). Average growth has jumped considerably. Between 2007 and 2011, 27 states had negative compound annual growth rates (Figure 11). This year, there are only six (Nebraska, North Dakota, Wyoming, Iowa, Alaska and South Dakota). The collapse in oil prices, along with low agricultural commodity prices, have been the biggest factors impacting these states. South Dakota, which has the largest contraction in financing growth at -7.8% CAGR since 2011, is heavily reliant on agriculture, which is volatile due to highly variant weather conditions and recent low commodity prices. While manufacturing remains strong, the market for equipment financing is suffering due to subdued construction gains and a depressed agricultural market. Early in the growth period, states like North Dakota and Alaska were experiencing an oil boom. The Bakken shale formation in the northwest corner of North Dakota saw high rates of economic activity, nearly tripling oil production in the region since 2005. The plummeting price of oil, however, has dried up most of the opportunities in the area. Since 2011, the by-state growth as switched dramatically. Alaska’s heavy dependence on the oil sector has caused small but persistent employment losses. The state government depends on oil revenues to fund 90 percent of its revenues, which means public sector investment is also down with the price of crude. Large oil exploration projects are ready to move forward, once there is a rebound in oil and gas prices. Wyoming’s oil sector has similarly bottomed out, which has caused contractions in the financing market. Environmental concerns will restrain new exploration and demand for Wyoming’s energy resources, which are primarily in the form of coal reserves. Wyoming governor Matt Mead is encouraging technology sector growth in the state, which may have a future positive impact on financing in Wyoming. Texas, a large energy producer in the United States, is still experiencing higher growth. It is likely that this financing growth will continue, as the repeal of the crude export ban will spur expansion and technological innovations continue to increase the efficiency of extraction. Currently, its hospitality, business services, health, and education sectors continue to grow payrolls, which is good news for the financing market. Financing activity in Alabama has been helped by the increase in business activity, as manufacturers like Remington Arms and Polaris have opened factories in the past few years. This expansion in manufacturing investment is likely the root of the Alabama financing market’s 8.9 percent compound annual growth rate between 2011 and 2016.
Looking forward, the equipment finance market is poised for a period of modest, but steady growth. 2016 has been a year of subdued growth, but financing activity has outperformed overall investment activity. Banks continue to hold the largest share of the market, although Captives and Independents have been gaining share and pushing the market in new directions. Interviews with executives in the equipment leasing and finance industry identified increased demand for managed solutions and fintech offerings as potential drivers of growth in the market. Despite low financing costs, investment in new equipment in software has been held back by excess global capacity, low commodity prices, a strong dollar, and sluggish export markets. IHS Market expects public and private investment in equipment and software to finish 2016 at 0.5% annual growth. Spending on equipment is forecast to improve in 2017 and 2018 as the drags from the stronger dollar and low energy prices dissipate and companies invest at rates consistent with an economy growing at a 2-3% rate. Public and private investment in equipment and software is expected to expand by 3.3% in 2017, and accelerate to 5.0% growth in 2018. Increased competition, though beneficial from a lessee’s perspective is putting significant pressure on profit margins. According to the 2016 SEFA, respondents indicated increasing cost of funds over the past two years, driving down pre-tax spreads. With abundant liquidity in the market, and limited growth in new equipment investment, competition for new business is fierce. An improving economy and increased investment in 2017 and 2018, should help to ease some of the pressure on margins