How have Equipment Leasing And Financing Sources Been Impacted By The Recession?

As we move towards the end of the year, equipment leasing and financing companies are still dealing with the financial impacts of the current recession.

Like any type of lender, a leasing company requires a source of capital which is made up of a composition of equity that is debt leveraged to the max to achieve the largest potential money supply at the lowest possible cost.

In 2009, the cost of capital for many lease companies went up as many of their related funding sources added greater risk premiums into their cost of borrowing for leasing products.  Add to this the increased number of business failures and resulting lease facility losses from delinquent accounts and the result has been less lease companies with more conservative lending policies and higher rates.

The more conservative lending policies are largely driven by two things.  First, the unpredictable nature of recessionary impacts makes it harder for lenders and financiers to assess the credit worthiness of any particular applicant.  So current approvals are targeted to low to medium debt leveraged companies who have some ability to withstand and manage through any reductions or anomalies in their respective cash flow.

Second, equipment leasing can be largely based on the ability of the lessor to predictably be able to liquidate an asset if necessary in terms of the the time it takes, the costs incurred, and the net proceeds they can expect to receive.  During recessionary periods where business failures occur, the market can see significant increases in supply for used equipment.  This can result in lender or lessor losses as forced liquidation values drop.

While these financing conditions exist for all types of lenders, equipment finance companies as a whole are significantly impacted due to their smaller relative size which does not provide them with a large margin of error.

For the business owners, the noticeable changes when seeking equipment financing are that overall rates for leasing products are higher than they were a year ago.  All things being equal, an approved equipment loan tends to come at a cheaper cost of financing than a comparable equipment lease.  This typically is only relevant for “A” credit deals, as there aren’t many equipment loan products available for lower credit applications.

For lease financing, The “A” credit risk lenders are looking for A+ deals, the B Lenders are looking for A to A- deals, and the C Lenders are looking for B deals.

There is credit to be had, but it can be hard to locate if your application is a mid to higher level risk.  And the rules change constantly as lease companies monitor their portfolios and their liquidation pathways in the market.

While lending policies and rates have loosened up a bit over the last few months, expect equipment leasing options to continue with higher rates and tighter terms for the foreseeable future.