U.S. Equipment Finance Market Study

As Chairman of the Equipment Leasing & Finance Foundation (the Foundation), I'm proud to present you with this groundbreaking U.S. Equipment Finance Market Study. The equipment finance industry is big, growing and plays a vital role in supporting the continued expansion of the U.S. economy by facilitating equipment acquisition through financing.

In the face of a rapidly changing market landscape, the Foundation saw the need to "define the universe" of equipment financeÑto gain an understanding of the industry's true importance to the U.S. economy and to uncover opportunities in the larger marketplace. The Foundation believes it is important to shed new light on how equipment acquisition is financed as well as to share insights on the current state of the industry and the short-term outlook for equipment finance. Industry leadership must understand the role these innovative approaches play in making long-term strategic decisions for company growth.

To accomplish this, the Foundation commissioned Global Insight, Inc. to conduct the most comprehensive research to date on the size and expected growth of the U.S. equipment finance market.

This study reveals that the equipment lease financing industry's overall size is $598 billion, nearly triple the value reported by lender surveys normally used to track growth. It tells us how much growth we can expect in coming years. And it provides a variety of useful information about the finance products used, the geography of the market, and much more. The commercial equipment finance sector provides the fuel that runs and grows the economy…it contributes to capital formation in the United States and abroad and is a key indicator of the commercial sector's underlying strength. Our industry develops and underwrites the financial products for companies to acquire and employ plant, equipment and software to operate their businesses and drive economic activity. Using a multitude of financial strategies, the equipment finance sector facilitates the efficient allocation of capital by U.S. businesses thereby enhancing business investment and capital formation in the nation.

The Foundation brings you this study, along with its many other products, because of our mission to be "Your Eye on the Future." Our forward-looking research is intended to provide you with information to aid in your long-range decision-making, and to help you devise your company's strategy for the future. As you read, share and use the information in this study, I ask you to remember that it would not exist without the generous support of companies and individuals across the equipment leasing and finance industry. The Foundation is 100 percent donor-funded, and it is only because our contributors understand that their gifts are investments in their careers, companies and industry, that we can continue to keep an eye on their—on your—future.

We invite you to explore the findings of the U.S. Equipment Finance Market Study.

Sincerely,

Michael A. Leichtling, Esq.
Chairman
Equipment Leasing & Finance Foundation
www.LeaseFoundation.org

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Preface: Purpose of This Study

In 2007, Equipment Leasing & Finance Foundation (The Foundation) commissioned Global Insight to conduct the most comprehensive research to date on the size and expected growth of the U.S. equipment finance market. By cross referencing various public and proprietary databases, the study provides an in-depth review and analysis of equipment financing volume at both the national and state level.

While this study utilizes data from a number of sources, a key input came from a custom survey of businesses that purchased equipment in 2006. The survey as part of the Propensity to Finance Study1 was conducted by Global Insight 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. 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.

Further information on this survey can be found in the Appendix.

Primary & Secondary Data Sources
The following data sources were referenced during the course of the study:

Federal Reserve Finance Company Survey
Federal Reserve Flow of Funds
Federal Financial Institutions Examination Council (FFIEC), Reports of Condition and Income
Monitor 100
Annual reports of leading independent and captive lessors
The Equipment Leasing & Finance Association (ELFA) Survey of Industry Activity
The Foundation's survey as part of the Propensity to Finance Study
Selected interviews with ELFA members

Market Segmentation
For the purposes of this study equipment financing refers to retail or end-user financing. The financing market estimates reflect domestic loans 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 are derived from lender based surveys by the Federal Reserve and others in collaboration with a survey of businesses that purchased equipment in 2006. The propensity to finance is determined by tracking equipment purchases that firms self report as being financed by leases (operating, capital, and other), term loan / dealer financing, line of credit (including credit card revolving accounts), cash (internal capital), and other.

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Executive Summary

Global Insight's research suggests that the equipment finance market is in fact significantly larger than previous estimates derived from lender surveys. The 2006 estimate for equipment finance market totaled $598 billion, nearly triple the value reported by lender surveys.
Current indicators suggest the U.S. is in the midst of a sluggish period for business fixed investment growth. Across all categories of investment, pent up demand has been largely satisfied and businesses will be cautious to make new purchases given the rising uncertainty about the health of the economy.
Global Insight's borrower survey reveals that cash reserves derived from company earnings, corporate bonds, and funds raised through the equity markets play a major role in the financing of equipment purchases for large companies.
Given that most small businesses do not access public capital markets for funding cash reserves, they are more dependent on retained earnings for their equipment purchases made with cash. As the demands on cash flow change over time, there may be an opportunity to provide financing for existing as well as new equipment acquisitions.
Within the small business segment the dominant form of financing is through a line of credit, which includes the utilization of revolving balances available on credit cards.
Equipment finance is somewhat concentrated geographically with the top five states representing 37% of the national market. California leads all states in the use of equipment finance, at $72.8 billion or 12% of the U.S. market.
Respondents to the 2007 Survey of Industry Activity reported that large-ticket volume grew a robust 32 percent to $15.6 billion, while market share rose slightly from the previous year, increasing from 11 percent to 12 percent. The industry as a whole grew close to 12 percent.
Profitability for the leasing industry, as measured by return on assets (ROA) and return on equity (ROE) is strong at 1.6 and 13.6 percent respectively, with ROA steady in 2006 and 2005.
Global Insight anticipates that the troubles in the housing market will have some spillover to business fixed investment, largely resulting from the lower growth rate of final demand. Recent improvement in the commercial paper market suggests that the economy will not be hit by a full blown corporate or small business credit crunch, but the risk is still present.
Based upon Global Insight's expectation that economic growth will continue to be positive and remain in the 1-2% range until the third quarter of 2008, both the equipment finance market will show a moderate gain next year. Overall equipment finance volume is expected to rise 5.1% next year, slightly ahead of the expansion in equipment investment.

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U.S. Equipment Finance Market Study

Preface: Purpose of This Study

Executive Summary

Table of Contents: