The equipment finance industry posted a solid year of growth in 2017, and recent data on business investment and confidence suggest that the industry is likely to repeat or improve on that trend in 2018, according to a new study from the Equipment Leasing & Finance Foundation.
Its 2018 Equipment Leasing and Finance Industry horizon report, prepared by Keybridge, reveals that approximately 60% of the $1.7 trillion in total private and public equipment and software investment in 2017 was financed, resulting in an industry sizing estimate of $1.01 trillion.
The report draws on the results of a new end-user survey the foundation conducted in August 2018 of more than 400 businesses, of which 255 acquired equipment in 2017.
Respondents reflect a diverse mix of small, medium and large firms across a range of industries with varying equipment needs, providing a snapshot of overall equipment acquisition trends.
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%).
Almost 60% of businesses use financing for acquisitions.
The end-user survey also revealed that 58% 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%), 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.
The survey showed 26% of respondents expect their equipment and software acquisitions to increase, with 12% expecting a decrease and 59% no change.
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 by a healthy 6.9% for the overall equipment finance industry in 2017 according to the annual Survey of Equipment Finance Activity (SEFA), a significant improvement over 2016’s 2.5% increase.
Similarly, ELFA’s 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.
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 still has some room to run.
As such, experts suggest there is reason to be optimistic about the US economy over the next year.
However, 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 employing and developing talented staff who are adept at critical thinking, communication and working with technology, among other skill sets.
Jeffry Elliott, foundation chairman and senior managing director of Huntington Equipment Finance, said: “The Horizon Report provides the best elements of prior State of the Equipment Finance Industry (SEFI) reports and the Foundation’s market sizing study.
“In addition to summarizing key industry performance data, this new format offers invaluable forward-looking economic and market insights from industry leaders and foundation researchers.”
The 2018 Equipment Leasing & Finance Horizon Report is available to download for free https://www.leasefoundation.org/industry-resources/horizon-report/.