In the final installment of this blog series discussing the implications of community banks entering our industry, I take a look at the impact of this trend on vendor program lessors. To be sure, there are significant opportunities for these vendor program lessors and smart banking partners alike.

Impacts to Vendor Program Lessors

The new banks entering our industry generally find this modality of our industry very different on so many levels that I do not perceive much risk here. Some of the perceived and real hurdles for new bank entrants are:

• Manufacturers, vendors and distributors, especially larger ones, are national in scope (obviously outside the banks’ footprint) – requiring bank lending policy changes;
• Credit scoring and adjudication speeds are simply a mental and cultural obstacle;
• Lack of relationships with the actual lessees not being the primary focus;
• Lack of existing technology and established processes to successfully compete;
• Impacts to bank efficiency ratios (expenses/revenues – think headcount) that do not take into account the higher profit margin contribution of the vendor leasing model.

Here is an example that will give you a sense of the potential of the cultural issues. Some time in my past I was involved in a conversation about our vendor program business with a bank’s C&I credit manager. During the course of my explaining the importance of processing speed, credit scoring, and the vendor business model, I was asked this question, which I paraphrase here: “Why can’t your vendors just do business with investment grade credits or, in the worst case, why can’t you just do the deals that are investment grade?” Enough said.

However, there is one real risk to independent vendor program lessors. Should a bank acquire a good vendor program lessor and they have a cultural fit, look out! That is an extremely powerful new asset generation engine. Why? Well simply put, vendor program lessors are good at business development! However, their senior team is spending a significant amount of their time and resources continually augmenting and maintaining their funding relationships in order to support their natural ability to grow assets. Post-acquisition by a good bank partner, the acquired lessor is freed to turn the turret fully towards growth and they will. We grew from $60 million in annual new business volume to $900 million in six years and then to over $3 billion per year in the next four years.

Here is another story gathered from my own experience that illustrates the point regarding a good cultural fit with an acquiring bank. Again, post-acquisition, we were busting at the seams in terms of our physical space. We knew the bank had open space in their main building in downtown Cincinnati and posed the idea of moving into that space to the bank’s CEO. He declined and when I look back on it, he made one of the smartest comments I have ever heard. The CEO simply said, “Not a shot, we’ll just infect you. If you need more room we will build you a building.” And so he did.

Opportunities for Vendor Program Lessors

There is ample history and proof from the ELFA and the Equipment Leasing and Finance Foundation studies that support the fact that the net charge-off (risk) of the equipment leasing and finance product is better than, or at its worst equivalent to, most traditional C&I lending. Therefore, the potential exists for these lessors to educate banks about their model. Banks with progressive management teams will understand the opportunity. It may not be a fast process, but lessors can quickly determine which banks to invest time into after the first meeting.

So what’s the point in educating the banks about the product and vendor model? They all need assets and a new C&I category of assets is quite attractive. Some of the opportunities for independent vendor program lessors to partner with these banks are as follows:

• Partnering with the banks’ current customers/prospects that are manufacturers, vendors and distributors of equipment;
• Having the banks provide warehouse lines of credit to temporarily hold the lessor’s transaction flow until permanently placed – looks like a LOC. (Remember the hammer analogy from the second part of this series?);
• Permanent placement of recurring transaction pools from the warehouse with the banks, while providing all the servicing expertise –- that’s the smartest and safest avenue for the banks, in my opinion;
• As an exit strategy as already addressed above.

Conclusion

There are clearly some legitimate concerns about an increasing number of banks entering the equipment leasing and finance industry. However, there are greater benefits for their entry. This is especially true if independent lessors educate and bring new bank entrants of their own into the industry.  As I mentioned in earlier installments of this blog series, the logical outcome of increased exposure for our industry is a greater acceptance of our financial alternatives to cash purchases. For every 1% improvement in equipment lease and finance penetration above the current 57%, we add roughly $13 billion in annual new business volume! A rising tide lifts all boats, so they say.  I would like to hear your thoughts and comments, pro or con by clicking on EFA’s Comments From Our Members link at the bottom of this post.