About the U.S. Equipment Finance Market Study
In 2007, The Equipment Leasing & Finance Foundation (The Foundation) commissioned Global Insight (IHS) to conduct comprehensive research on the size and expected growth of the U.S. equipment finance market. In 2012, The Foundation commissioned IHS to conduct a new study, analyze changes, and forecast future growth. By cross-referencing various public and proprietary databases, the new study provides an in-depth review and analysis of equipment financing volume at the national and state level.
While this current study utilizes data from a number of sources, a key input came from a custom survey of businesses that purchased equipment in 2011. The Foundation borrower survey was conducted in August/September of 2012 by IHS on behalf of The Foundation. In the course of the survey, respondents were asked to convey key current and historic data concerning their firm's industry classification, revenue, size, value of equipment purchases, and financing tendencies by equipment type. The respondents also shared their opinions on the key drivers of the equipment investment and made forward-looking statements regarding their intent to increase investment. Because much of the data provided by survey participants contained sensitive company-specific information, the results have been aggregated in this report to ensure confidentiality.
This report offers an independent assessment of the equipment financing market. Although The Foundation served as a resource and reviewer of findings, IHS is exclusively responsible for this report and all of the analysis and content contained herein. The analysis and metrics developed during the course of this research represent the independent views of IHS and are intended to provide a comprehensive look at the current state of the equipment finance market and how the environment may change in the future. Because it is impossible to address all interpretations of these outcomes, IHS encourages the reader to form their own assessment of the report conclusions as they pertain to their particular business activity.
Primary & Secondary Data Sources
The following data sources were referenced during the course of the study:
- Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices
- Federal Reserve Flow of Funds
- 2012 Monitor 100
- The Equipment Leasing and Finance Association (ELFA) 2012 Survey of Equipment Finance Activity
- Foundation surveys
- IHS Equipment Market Monitor
For the purposes of this study, equipment financing refers to retail or end-user financing of equipment and software. The financing market estimates reflect lending to businesses and government agencies. This allows for a clearer comparison to the Department of Commerce statistics on U.S. equipment investment.
Equipment finance volume estimates in this study are primarily derived from a survey of businesses that acquired equipment in 2011. IHS also incorporated lender-based surveys by the Federal Reserve and others to capture industry trends. The propensity to finance is determined by tracking equipment purchases that firms self-report as being financed by leases (operating, capital, and other), secured loans, lines of credit, cash or credit card (paid in full each month), and other.
The equipment finance market has emerged from the Great Recession with renewed vitality. Finance volumes are at all-time highs, the return on assets is at a five-year high, and the charge-off rate is at a five-year low. Banks have taken a more prominent role in the market, but there are still many viable market segments where captives and independents have excelled. During the climb back to previous peak finance volumes, the equipment finance industry has reaped the benefit of double digit growth in equipment investment and a favorable interest rate environment. The weight of evidence from this study suggests that the equipment finance industry will find the next 12 to 18 months to be more challenging overall. Businesses faced with rising uncertainty over the economy and regulatory policies will be more cautious about spending on equipment and software, as well as taking on more credit. The silver lining to this cloud is that technological innovation and equipment replacement needs should spur rapid growth in volume in late 2014 and beyond. A summary of the key study findings follows.
- In 2012, equipment finance volume has returned to pre-recession levels and the 2012 estimate for the equipment finance market is $725 billion. The current IHS macroeconomic outlook and the 2012 Foundation borrower survey suggest the equipment finance market will expand over the next two years; however, the growth rate will slow.
- The equipment finance sector is a significant contributor to capital formation in the U.S. economy. Of the projected $1.3 trillion to be invested in plant, equipment, and software in 2013, 55% ($742 billion) of that investment is expected to be financed through loans, leases, and lines of credit. In 2014, the market size is projected to grow by $36 billion to $778 billion.
- According to the 2012 survey, 72% of firms used at least one form of financing (excluding credit card use). Companies with less than $1 million in revenues used financing in only 49% of their equipment acquisitions, while companies with revenues between $25 million and $100 million used financing in 86% of their acquisitions.
- Bank financing dominated the market, according to the 2012 Foundation borrower survey, and increased its share of the market relative to the 2007 borrower survey. This increase in share reflects banksâ€™ low cost of funds, which provides organic growth, as well as the challenges many independent finance companies faced during the downturn. Banks were the primary lenders across all equipment types in 2011, with the smallest penetration in trucks and trailers. Medical equipment financing shows a significant shift from manufacturers to banks from 2006 to 2011.
- Between 2006 and 2011, banks actively moved their new financing volume to companies with lower risk profiles. The share of bank financing of highly profitable companies rose from 26% to 47% between 2006 and 2011, while the share of bank lending to unprofitable companies declined from 65% to 53%.
- The share of cash payments declined for large companies from 2007 to 2012, according to Foundation surveys, as larger companies have enjoyed greater access to credit markets. In the current low interest rate environment, financing equipment acquisitions is especially attractive.
- According to the Foundation survey, companies with sales between $25 million and $100 million doubled their share of leasing volume from 2006 to 2011. Companies with less than 51 employees also doubled their share equipment acquisition via leasing in this time period. This may be in part a reflection of the difficulty in obtaining other forms of credit for these segments of the market.
- Both the 2012 and 2007 Foundation surveys confirm that larger ticket purchases are financed to a greater degree than smaller ticket purchases.
- Even though the overall share of computer hardware financing has declined, the Foundation survey analysis reveals an increase in the share of leasing of computer hardware acquisitions between 2007 and 2012. The share of leasing of software acquisitions has also increased as captives have rolled out more financing programs and independents are increasingly attracted to this asset class.
- As revealed in the Foundation survey, the share of financing in furniture and fixtures acquisitions has risen dramatically from 40% in 2006 to 83% in 2011. The increase is likely due to a greater propensity to bundle furniture and fixtures purchases as well as additional â€œsoft costsâ€� such as delivery, warranty, etc., with other financed assets.
- According to the 2012 Foundation survey, larger companies are more concerned with the pending elimination of off-balance sheet financing. This may be due to large companies having a greater propensity to make large-ticket acquisitions that are often financed through off-balance sheet structures.
- Corporate perceptions of the economic outlook are the primary driver behind business investment decisions. Small companies have the greatest degree of concern about general economic conditions, according to the 2012 Foundation survey.
- In the 12 months following the Foundation survey, 30% of companies anticipate increasing their equipment investment, according to the 2012 Foundation survey. This group of companies is disproportionately represented by large companies.
- Business investment spending for equipment and software is expected to slow over the 2013 and 2014 period. Although there will be pockets of strength, overall finance volume is not expected to keep pace with total investment during this period. Small businesses, which represent more than half of the volume of equipment finance, are expected to curtail spending. According to the IHS macroeconomic outlook, sometime during 2014 as business uncertainties begin to wane and the prospect of higher interest rates looms, larger firms may be inclined to draw on their cash reserves to acquire equipment. This adjustment would contribute to finance volume growth trailing the overall growth in equipment investment.
Table of Contents
- Purpose of this study
- Primary & Secondary Data Sources
- Market Segmentation
- Executive Summary
- Gauging the Current Market for Equipment Finance
- The Prospects for Equipment Finance Growth Improve, but Challenges Remain
- Finance Market Evolves in the Wake of the Recession of 2008-09
- Shifts in Software and Hardware Financing
- Banks Capitalize on Market Conditions
- Creditorâ€™s Perspective
- Analysis of the 2012 Survey of Equipment Finance Activity
- Industry Financials
- Credit Quality
- Accounting and Regulatory Issues
- Short-Term Outlook for Equipment Finance
- Multiple Factors Drive Investment Trends over the Next 12 Months
- Economic Outlook
- Opportunities and Risks
- Capital Markets