For the past several years, concerns about margin compression in the leasing and equipment finance industry have continued to mount. When you combine this with slower growth, increased competition, and a number of other factors, it can be difficult to determine the best way to gain a competitive advantage.

Yet, by focusing on factors outside of our control, we often overlook what’s right in front of us. By focusing on internal operations and procedures, leasing and equipment finance industry executives can create value for their company and their customers.

External Factors – Outside of our Control

There are several factors that one can attribute to the downward profit trends within the leasing and equipment finance industry, and some of the most common culprits are beyond the control of lease finance executives. For starters, the global economy is always difficult to predict. Two years ago, who would have imagined that oil prices would plummet to under $50 a barrel and remain there for a sustained period of time?

The impact of increased government regulation is not only affecting banks, but other types of lenders and industries at large. Additionally, the Federal Reserve is busy analyzing the health of the economy and trying to determine their interest rate hike schedule. This uncertainty is wreaking havoc in the markets. And, speaking of uncertainty, it’s an election year!

There are also a number of industry factors that cannot go ignored:

• Increased Competition: Competition is becoming heavier for financiers and lessors across nearly all sectors, and is one of the major drivers of margin compression.
• New Market Entrants: The digital age has spawned the growth of alternative lending sources. These lenders tend to approve more borrowers with poor credit and offer more flexible terms and conditions.
• Higher Cost of Funds: Write-offs are always a major factor in evaluating COF. We expect write-offs for non-performing loans in 2015 to come in higher than 2014, which will add to margin compression and put additional downward pressure on net interest income (NIM).

The Importance of Selling, General, and Administrative (SG&A) Costs

Though it is good to be aware of the external and industry factors that are squeezing profits, it is best to focus on areas within your control that can help reverse the trend at your organization.

One of the most often overlooked factors driving margin compression is selling, general and administrative (SG&A) costs. SG&A expenses consist of the overhead costs of operating your business.

Here is a general overview of each of these three areas:

• Selling: Costs associated with developing and marketing your financing/leasing products and services to your targeted industries.
• General: General costs associated with assessment/screening, processing and servicing your loans.
• Administration: Costs of administration and operation of your offices and locations.

SG&A can account for a significant percentage of your cost of funds, and it is essential to pay close attention to this area. Basing strategic funding and pricing decisions on interest rates or cost of wholesale funds and write-offs without considering the influence and impact to SG&A can cause your expenses to spiral out of control and lead to costly declines in margin. This is particularly true if you have internal production/processing issues that have been ignored in favor of implementing tactics to just “do more business.”

Five Potential Opportunities to Optimize Efficiencies

SG&A is an area in which administrators have a great deal of control and ample opportunity to reverse margin compression. For example, the impact external factors have on margins can be mitigated significantly by streamlining operations. The first step in this process is to identify areas of your organization where operational efficiencies can be enhanced. These may include:

1. Data Entry Automation:  Data entry is one of the most mundane, time-consuming and labor intensive tasks for financing and leasing organizations. In addition, entering data manually creates errors that may be costly to correct later on. By automating data entry, you can significantly reduce the workload while vastly increasing the accuracy of your critical organizational data.
2. Document Processing Automation: Automating key aspects of loan/lease processing can help improve productivity and streamline the underwriting process. The end result is significantly lower approval times and the ability to better control operational costs by processing more volume without having to increase staff.
3. Document Management: Automating the document storage and retrieval process gives employees the tools they need to quickly and easily access important documents when they are needed the most. This helps improve security and efficiency while allowing your organization to provide better customer service.
4. Optimizing Human Resource Efficiencies: Upgrading technology in your HR department helps eliminate data entry redundancies, ensure regulatory compliance and protect the privacy of all members of your organization.
5. Business Process Outsourcing: Many of the mundane, yet essential tasks necessary to keep your company organized and running efficiently can be outsourced. This allows you and your employees to focus their energies on the core functions necessary to operate the business.

Performing a Comprehensive Analysis and Review

Many financing and leasing companies overlook the impact of SG&A when building their strategic funding and pricing decisions. They compound the issue by attempting to overcome operational inefficiencies by trying to increase market share and by doing a higher volume of business. While bringing in more customers is always a desired result, doing more business while simultaneously increasing efficiency can have a far greater positive impact on your bottom line.

A great place to start is to perform an operational audit to identify:

• Area(s) of operation to evaluate and measure (e.g. productivity metrics, key performance indicators, etc.);
• Where your organization may have bottlenecks that can be alleviated or even eliminated;
• Which innovative technologies can be implemented to effectively address your needs;
• The projected reduction in the cost per transaction after resolving operational inefficiency;
• The Internal Rate of Return (IRR) and the impact to profitability.

Technology, systems, and processes are evolving at breakneck speed in the financing industry (as well as most other industries). Those who are proactive and take steps to stay on the cutting edge will be able to continue offering competitive products and services well into the future. If it has been a while since you fully reviewed the operations of your organization, this may be the time to take a closer look at what might be available to optimize the efficiency of your business model.

For more information, visit www.mtssoftwaresolutions.com.