Experts predicted 2020 would be a year of moderate growth with good portfolio performance for the equipment finance industry. Instead, the COVID-19 pandemic rocked the industry, leaving many companies scrambling to operate remotely while working with customers who desperately needed assistance navigating uncertainty.
The good news is the Great Recession from late 2007 to mid-2009 provided a blueprint for avoiding a bigger catastrophe. Rather than moving too slowly, the Federal Government and lenders acted swiftly. The Federal Reserve lowered rates. The Treasury provided liquidity. The Legislative and Executive branches injected $3 trillion of stimulus into the U.S. economy. And many lenders offered payment relief where needed without any questions asked.
But even with large and fast moves, the second quarter (Q2) tanked. Gross Domestic Product (GDP) dropped by a historic 32 percent. Thankfully, the third quarter (Q3) offered hope. It showed a rapid rebound with a 33 percent increase in GDP from Q2. Lenders’ portfolio performance improved dramatically with almost 90 percent of all companies who went on payment relief making payments as agreed. Now, portfolios are performing better than expected, but lenders are still reserving cash for higher forecasted portfolio losses.
Equipment finance demand has surprisingly remained steady. Through October, total financed volume was off only 5 percent from 2019 figures, according to the Equipment Leasing & Finance Foundation. Certain asset types have been more popular than others. Technology equipment has remained exceptionally strong as businesses digitally changed their operations almost overnight. Other businesses have seen a surge in equipment acquisitions to meet unexpected demands for their goods or services because of a change in buying behavior, new COVID-related safety regulations or to help regional economies battle or recover from fires, storms and other disasters.
The crisis affected smaller companies more than large or midsized companies. Nearly 40 percent of smaller businesses were temporarily closed at the peak of the pandemic in March and April. The Paycheck Protection Program provided a needed life raft with more than $521 billion of forgivable loans to nearly 4.9 million small businesses nationwide, according to the Paycheck Protection Program (PPP) Report.
Throughout 2020, financing has been available. According to the Equipment Leasing & Finance Foundation, more than 70 percent of companies that apply for equipment financing are approved. The industry survey was at its highest level since March at 72.9 percent.
The variables that lenders consider for approval have slightly changed. Time in business is still the leading indicator a lender will get paid back. Current cash flow, leverage and cash-on-hand are now more important than prior credit history. A business’s type of industry and regional location are also key components for approval. Businesses in higher-risk industries will be examined more closely and some lenders have restricted certain industries altogether.
The future is unknown. Most finance companies forecast a slower recovery from here on out. Unemployment is still high at nearly 8 percent. Many temporary layoffs and furloughs are becoming permanent and those who remain unemployed no longer have added disposable income provided through the CARES Act. The CARES Act provided a one-time payment ranging from $1,200 to $3,400 per household plus $600 per week for the unemployed. In many instances, the extra $600 brought the lowest income wage earners above their pre-crisis income levels. Many mortgages and rents will come off deferral or payment relief. The number of consumers unable to resume payments after deferral is unknown.
Finance company leaders are hopeful the economy will get a bigger boost from a viable COVID-19 vaccine. Some scientists are optimistic a vaccine will be available by the end of 2020. Availability to the public could come as soon as 2021. A viable vaccine potentially would allow all businesses to open back up and create confidence the economy has not seen since February 2020. Lenders also hope a second stimulus bill will pass if needed. A vaccine and stimulus bill could give the economy the jolt it needs to create more of a V-shaped recovery versus a slower swoosh or W.
With all the uncertainty, the equipment finance sector could see further tightening of credit and a pullback in small and mid-sized transactions below $250,000 to $500,000, according to the Equipment Leasing & Finance Foundation. The industry also may see consolidations with finance companies focused on industries deeply impacted by COVID-19 or banks that want to exit the space and focus instead on their core product offerings.
The bottom line is that despite the uncertainty, the equipment finance industry remains strong. Many finance companies are well positioned to deploy capital and fill the needs of businesses across the country for those seeking capital for essential business equipment.
This article was written by Scott Enbom, Senior Vice President of Business Development at AP Equipment Financing.