The 2018 Equipment Leasing & Finance Industry Horizon Report is a hybrid version of the annual State of the Equipment Finance Industry report (SEFI) combining the best elements of prior SEFI reports and the quadrennial market sizing study. The Equipment Leasing & Finance Foundation commissioned Keybridge to conduct this comprehensive research on the size and expected growth of the U.S. equipment finance market.
In addition to summarizing key industry performance data, this year’s version places more emphasis on forward-looking economic and industry insights—including near-term and medium-term economic risks and emerging industry trends related to the future of work—based on input from industry leaders and Foundation researchers.
Highlights from the 2018 Equipment Leasing & Finance Horizon Report include:
- Leasing leads the pack. According to the end-user survey (which focused only on private sector investment), the most common payment method used by businesses to acquire equipment and software in 2017 was leasing (48%), followed by lines of credit (9%) and secured loans (8%). Among non-financed acquisitions, cash (23%) was the most prevalent payment method, followed by paid-in-full credit card purchases (10%) and “other” (2%).
- Nearly 6 in 10 businesses use financing for acquisitions. The end-user survey revealed that approximately 60% of respondents who acquired equipment or software in 2017 used at least one form of financing to do so (i.e., lease, secure loan, or line of credit). While this result is lower than the Foundation’s 2016 estimate (78%), it is noteworthy that the 2017 respondent sample is not the same as that in 2016. In addition, the decline may be a result of the rise in interest rates that has increased the cost of borrowing. It may also stem from the substantial improvement in small business confidence that occurred in 2017, which triggered greater equipment investment activity among smaller firms that may be less likely to use financing methods.
- Propensity to finance remains stable. More than twice as many respondents expect their equipment and software acquisitions to increase vs. decrease over the next 12 months (26% increase; 12% decrease), though the majority of respondents expect equipment and software acquisition to stay the same (59%). Of the respondents who expect acquisitions to increase, most (67%) anticipate paying for at least a portion of that cost in cash, but 59% of respondents expect to use a financing method — suggesting that the propensity to finance is relatively stable.
- New business volume expanded in 2017. New business volume expanded by a healthy 6.9% for the overall equipment finance industry in 2017 according to the Equipment Leasing and Finance Association’s (ELFA) annual Survey of Equipment Finance Activity (SEFA), a significant improvement over 2016’s 2.5% increase. Similarly, the ELFA Monthly Leasing and Finance Index (MLFI-25), which is based on a separate monthly survey, recorded a 4.6% increase in new business volume in 2017.
- Portfolio performance healthy despite pressure. Based on SEFA data, both yield and cost of funds rose in 2017, while average spreads compressed for the fourth consecutive year. Although there is evidence of compression across business types, the effect was most pronounced for independents and captives, for whom spreads fell by 29 basis points and 21 basis points, respectively, on a weighted-average basis. Meanwhile, the industry continues to demonstrate discipline with respect to risky lending and deal structures, as portfolio performance remained healthy in 2017 across various metrics and types of lenders.
- Economic expansion has “room to run.” Although the U.S. business cycle is nearly a decade old and the economy is approaching the longest period of growth on record, most economic indicators that have historically provided an early warning sign of a downturn suggest that the current expansion likely still has some room to run. As such, there is reason to be optimistic about the U.S. economy over the next 6-12 months.
- Challenges from the future of work. Advances in computing technology, including artificial intelligence and machine learning, will pose challenges for the equipment finance industry, particularly for management. To successfully deploy new systems, they will need to overcome resistance to changing previous mindsets, as well as recruit and develop talent who are adept at critical thinking, communication and working with technology, among other skill sets.