Funding for Small and Medium-sized Businesses in Today’s Environment: An Independent Lessor/Funder’s PerspectiveBy Nancy Pistorio
The economic challenges over the past three years have been so drastic that historic business models, regardless of industry, have changed dramatically. Not long ago it was the order of business for many leasing companies operating in the small ticket arena and lending to private firms, to simply credit score everything with most of the emphasis placed on the personal credit scores of the businesses’ owners. This formula appeared to allow for high volume and efficiency while keeping default rates at acceptable levels within a funder’s portfolio. For leasing firms willing to take more risk, it was not unusual to further secure some transactions with a lien on the business owner’s personal real estate.
In the recent economic downturn, neither of these avenues of extending credit has held up well. As a matter of fact, for some, the traditional approach used to extend credit turned out to be a recipe for disaster. As delinquency and default rates soared, portfolios were in shambles and additional collateral positions were essentially worthless. In addition, the economic slowdown exposed many large, pyramid-type fraud schemes which had gone undetected for years. A large number of leasing firms were put out of business. For the leasing firms and banks who survived, many were forced to scale back dramatically or exit the small ticket leasing arena altogether.
As confidence in the economy has gradually begun to return and delinquency rates have subsided, lenders are anxious to replenish their portfolios but seemingly only with “A” quality credits. This has posed extreme challenges to small and medium-sized businesses seeking financing to start, continue, or even grow operations. Unless they are long established with excellent credit, many traditional avenues of financing are still not available to them. For the lenders, the market of “A” credits buying new or replacement equipment is sharply down causing a lack of volume for those trying to rebuild portfolios. The oldest and strongest business borrowers are still proceeding cautiously when it comes to acquiring new equipment or vehicles. This lack of volume is having the effect of driving rates down to extreme lows. One might argue, while it is good for those businesses who qualify, it is unrealistic “pricing versus risk” for the lenders and likely not prudent in the long run.
Where does this leave us? With bumpy news on the economic front including continued poor housing and unemployment numbers, things remain sluggish on the demand side for many lenders and, with the lack of real estate equity and other personal assets, there is still not enough available credit for the less-than-perfect borrower.
Many small and medium-sized businesses today find their bank borrowing capacity has been reduced or quickly “maxed-out.” With greatly reduced or negative home equity positions, lines of credit and credit cards are not the financing option they once were for smaller businesses either. Some have turned to private lenders, but at a high cost. Rates can be as expensive as twenty to thirty percent or more. This is often a last resort for a business and generally not appealing.
For the independent lessor competing for volume in the small ticket space, today’s circumstances can provide solid and profitable business opportunities if approached in a practical manner. Things to consider in one’s business model would include the following:
- Adjusting scoring models with certain parameters that will call for an actual analyst’s review, rather than produce an automatic decline, can result in additional approvals. Once the full picture is adequately analyzed, the transaction may pose an acceptable “risk versus reward” for the lessor.
- Approaching vendors previously thought to be out of reach for the smaller independent can produce unexpected positive results. Vendors are now more receptive to working with more than just the traditional high-volume “program” lessors. Today’s vendors, also suffering from lower demand for their products, require funding for a wide array of credit quality customers. With fewer sales, each approval or decline is more meaningful. They need lenders who will find creative ways to approve more transactions. The cheapest price is not necessarily today’s top consideration in driving a vendor’s choice of a financing partner.
- A willingness to finance unconventional, but necessary, business equipment can uncover new opportunities for growth with solid firms. Examples include school buses to private transportation companies, taxi cab medallions, and helicopters that provide weather and traffic updates in major metropolitan areas. With a bit of creative thinking, there is no limit to the types of business “equipment” or vehicles that may suit a company’s lending parameters and appetite.
- Ramping up marketing and networking activities is also critical in this environment. While they were in a fight for survival mode, many leasing and financing firms had scaled back these activities. Businesses may not realize the independent lessor is still out there. Letting the business community know you are actively engaged in lending and looking for additional business is crucial.
- A return to some prudent structuring enhancements can also improve a lessor’s position in a transaction potentially leading to an approval that, at first look, might have been a decline. Enhancements such as placing liens on paid-off corporate vehicles, a pledge of the cash surrender value of life insurance, or additional security deposits to be held for a period of time can all help to provide that little extra that may be needed in some circumstances.
Equipment financing today is not a business for the faint of heart, those inexperienced in the industry, or not well-schooled in the art of credit analysis. The pool of competitors active in the small business lending market has diminished significantly. However, those independents remaining will prosper in this current climate by revamping business models, bolstering sales efforts, and redirecting business focus to new and previously overlooked areas of opportunity.