Randy Haug, Executive Vice President, Vice Chairman, and Co-Founder of LTi recently spoke about how the equipment finance industry has been dealing with the pandemic, the highs and lows of 2020, and the future of equipment finance for 2021.
Positive economic tailwinds showing through in the marketplace
As shown by the Equipment Leasing & Finance Foundation, Q3 and Q4 2020 were very good quarters for equipment finance companies.
Business investment expanded in Q4, recovering for the second consecutive quarter after dropping during the pandemic. Business investment expanded 13.1% (annualized) in Q4 after rising 22.9% in the previous quarter.
Haug suggests that business investment is expanding due to improving labor markets, continued low interest rates, and strong corporate earnings.
One of the greatest indicators of where the Equipment Finance industry is going is by looking at the Equipment Leasing & Finance Foundation Confidence Index
The Equipment Leasing and Finance Foundation reports “confidence in the equipment finance market as 76.1, an all-time high and an increase from the March index of 67.7.
Haug says that the Confidence Index is being driven by five different factors:
- People are getting vaccinated in a quicker fashion, which creates more normalcy for the economy.
- There is more pent-up demand and companies are going out and looking for new equipment. That pent-up demand from last year is equating to more equipment finance opportunities for the industry.
- People have become much more optimistic, which leads to an optimistic economy, which creates equipment finance demands.
- Companies see the pent-up demand and want to expand their capital budgets.
- Interest rates are very low making it a favorable time to buy equipment.
There is huge growth going on in different market segments
Haug indicates that there have been some great highlights for several different industries. For instance, for the agriculture industry, crop prices are at an all-time high.
From farmers, big Ag companies, to the food services business, the past year has been an absolute success for the agriculture industry. It has created more competition and a very active and fluid financial marketplace. In addition, Haug points out that when farmers are making money, they are spending money on new equipment as well.
When COVID-19 came, the equipment finance industry needed to examine more closely how they performed risk rating
Haug feels encouraged after seeing how the COVID-19 environment affected risk rating in the industry. During economic downturns, businesses get more careful about what they finance and the margins they finance in. Deals done in the down years perform better than deals done in the good years because you have more competition and rate compression during the good years. In the good years, businesses get less margin and become less vigilant with credit.
Haug predicts that we’ll see transactions perform extremely well in the next three to four years and leasing companies gaining large profits from it.
The U.S. economy is growing, but it’s not frictionless
The U.S. economy has always moved in a stop-and-start type of environment. It’s always growing but it’s not entirely frictionless. The one thing the U.S. economy has shown through the pandemic is that it is stronger than most countries. By the end of 2021, we’re going to see people getting back to a much more normal cycle and what normal looks like moving forward will be directly affected by COVID.
Americans are very resilient. We’re much more caring now making sure we’re taking care of each other and keeping our families safe while still being able to conduct business either at home or in the office. The flexibility, compassion, and resiliency that have come from the pandemic will be what propels the U.S. economy forward.
Read the full report here.