Growth in the equipment finance industry is highly dependent upon many economic factors including the economic viability and confidence of the small business sector of the economy. And, much like The Little Engine that Could – which tells the tale of how a small engine succeeds in pulling a long and heavy train over a high mountain, when larger and stronger engines refused to try – the powerful engine of the small business economy is once again succeeding and pulling the U.S. economy over one of the most challenging mountains ever imagined. The “I think I can” motto seems to be paying off once again.
Sustainable demand for goods and services is often described as the not-so-secret ingredient for economic growth. While demand for both continues to climb in the U.S., the question remains – have we finally turned the corner toward a period of sustained optimism leading to growth in equipment investment for both expansion and replacement equipment? For the first time since the Recession, most independently conducted surveys indicate a majority of business executives are optimistic about the U.S. economy for the year, and companies are beginning to focus more on growth and yes – capital investments.
According to the latest release of the Thomson Reuters/PayNet Small Business Lending Index (SBLI), small business investment activity is growing at an accelerated pace – with the SBLI registering 115.3 in March 2014, reflecting an 18% year-over-year increase – and the largest increase since January 2012. To gain greater insights into how small businesses will impact the equipment finance industry, we turned to William Phelan, president of PayNet, Inc., for his review of this important sector of the U.S. economy.
As Phelan sees it, things are moving in the right direction. “We’re finally seeing what looks to be a period of sustained growth and expansion in the economy – and this is good news for the equipment finance industry,” says Phelan. “We track the small business sector as a leading economic indicator. When a small business owner invests to expand or replace worn out equipment, he/she does so based on current and anticipated growth in demand for goods and services, which is what we are seeing now, and this is causing business owners to increase capacity to some level. We are seeing consistent single-digit growth, which leads us to conclude that there is demand to replace worn out equipment and purchase new equipment.”
But the U.S. economy, like most economies, experiences various business cycles, and recent expansion -- seemingly good news -- has often been met with trepidation by our industry. After all, we’ve seen positive trends in the economy over the past three to four years only to be disappointed. To this Phelan offered, “Economic cycles go through phases -- they typically move from a period of expansion into a slump exhibiting no growth or even some slight contraction in GDP, sales, business investment, or consumer spending. Then they typically fall into recession, which is a contraction of GDP. From recession the cycle shifts to recovery mode, with rapid expansion, and finally there’s a movement into a period of sustained growth. The recovery is over and the economy is in the expansion phase, but it’s not a booming expansion. The key question is whether or not this economy will move into a more explosive expansion or remain slow and steady.”
Phelan continues, “The conditions are positive for continued growth. The delinquency index which is at 1.20%, means only $1.20 out of every $100 of loans are past due. To put this into perspective, back in 2005 and 2006, the 30-day delinquency was about as low as 1.71%. So, we are seeing terrific credit conditions for small businesses – meaning they have plenty of financial capacity to take on more debt and to expand their businesses. And, this can eventually lead to more explosive growth.”
Cash Is King – Or Is It?
Much of the data released by the federal government indicates the recession had a dramatic effect on the philosophical approach taken toward balance sheet management by most chief financial officers and business owners. This shift in mindset has led to unprecedented cash balances. The availability of cash has historically been considered a “competitor” for equipment finance companies and banks seeking to finance capital investments.
While Phelan agrees that businesses have a lot of cash on their books, he offers a more positive outlook saying, “All the cash on balance sheets and the scars from the Great Recession bode well for equipment financing. Over $1.5 trillion in excess cash sits on bank’s balance sheets. Businesses have deposited the money in a safe spot until investment opportunities return. You would think all this cash means less equipment financing. The reality is CFO’s are holding more cash after looking into the abyss during the Great Recession. They found religion. Bigger stores of cash give businesses the confidence to invest in capital projects. The desire to hold higher cash balances means more businesses have the capacity to finance their capital projects.”
Phelan backs this statement with a recent experience in which PayNet held a forum featuring a panel discussion with three business owners. According to Phelan, it was evident that these business owners want and need fast and convenient access to capital, and they are willing to pay higher rates for access to financing with desirable service levels.
“These factors create excellent conditions for equipment finance companies,” says Phelan. He continues, “If any industry in America makes it easy to access capital, it’s the equipment finance industry. A business can get a loan approved in a day and funded the next day. This service remains a hallmark of the equipment finance industry unmatched by traditional bank lenders. So we see the equipment finance industry having a natural advantage in the market and this applies to both independent finance companies and bank-owned equipment finance companies.”
Sector Hot Spots and Not So Hot Spots
As the U.S. shifts from a manufacturing-based to a service-based economy, many equipment finance companies have also “shifted” their focus toward financing softer assets. This is not to say that financing of manufacturing and industrial equipment is a thing of the past – far from it. But, it does potentially change the outlook for “hotspots” related to capital expenditures.
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