The year ahead will be full of false starts, awkward circumstances and learning opportunities, symptomatic of a world in a state of dramatic flux. Simultaneously, a brave new world is being penciled out for us in the commercial finance marketplace, certainly characterized by a dramatic transformation in sources and availability of funding and the definition of credit standards, but affording very little certainty beyond that. Equally dramatic, at least in promise, is the likely scope of the government’s role in our business. A newly energized sense of mission at the Federal level to protect us from ourselves, buoyed by political popularity, will certainly result in unprecedented levels of government participation in the arenas of corporate governance in general, banking, finance and credit. Perhaps the most impactful factor, however, is the simultaneous and unprecedented demographic and psychographic transformation unfolding in our society, driving our political and economic priorities, and shaping our ultimate way of life.

Cycles Versus Permanent Change

Money to lend comes from surplus cash flow and surplus cash flow is a bi-product of healthy commerce. Consumer spending, either directly or through spending on government in the form of taxes, is the only engine that drives healthy commerce. Although the short term pace of commerce has an impact on our business, the future spending habits of Americans are also being significantly and lastingly altered by more profound global economic, social, environmental and energy market factors. Our concern with the short term direction of the economy, up or down, should be conditioned by an awareness of the unusual dynamics and metrics of this new market where we hope to earn our living and make our businesses prosper. Everyone reading this article that is over the age of 50 will likely retire from their careers in commercial finance before we ever again see market conditions remotely like those that fed our industry for that last 20 years. While some of the economic extremes and incongruities we are dealing with today are certain to be short lived, other imposing factors show the potential for permanence. A recent study conducted and published by Alexis Partners, a global business advisory firm, suggests that American consumers predict their “New Normal” for spending levels will be 86% of pre-recession levels. Even at half that rate, it still represents a 7% contraction of a baseline recovered economy supporting our industry, going forward. Think of it in terms of an enduring 7% drop in credit applications, funding activity and finance revenues. And this is the predicted baseline, not for a recovering economy, but rather for a recovered economy!

What’s perhaps most significant about these survey results is their telegraphing the consumer’s sense of this economic downturn as something more than the occasional bump in an otherwise upward trending economic growth curve we have enjoyed for the last 10 years. Part of what colors their perception has to be the emerging competition between world economies for energy resources, or perhaps it’s the reality of home values diminishing so deeply and for such a protracted period. Other less clearly visibly factors are also at work suggesting our economy is in the early stages of a protracted transformation. The aging of America, for instance, carries with it reduced demand for larger homes, increased demand for health care, more strain on Social Security and Medicare. While the US savings rate is currently growing, most likely a reaction to short term risk of unemployment and shrinking 401Ks, a declining savings rate and lower overall consumption is also likely in the near future with people spending what they have been saving for retirement and living on reduced incomes. Other equally impactful new developments include growing global concern with climate change and the broad transformation of the energy industry and markets. Perhaps most significant is the apparent political transformation signaled by the latest election. All these factors are synergizing to form our new world for the rest of this century.

The Past is Truly Past

Virtually all of my 20 plus years of experience in this industry have been spent in service to the small and middle ticket Broker segment. I have always been proud of the role of the broker segment, a group of entrepreneurial small business people tending to the finance needs of other small and mid-sized business owners across the country. This small to mid-sized segment of our economy epitomizes the innovative, can-do nature of our country, while accounting for a substantial portion of new jobs in healthier economic times. For purposes of predicting our future vitality as an industry, I believe the broker segment is the canary in the coal mine.

Our industry’s immediate future will most certainly be defined by fewer money source options and fussier credit appetites. Besides the disappearance of many familiar funding sources from the segment, the persistent uncertainty of asset values and the direction of the economy have precipitated a near total undermining of old reliable credit yardsticks and funding parthways. The value of both credit scoring and full financial review models depends upon the past being a reliable and sufficient predictor of the future. Traditional credit work has assumed that nothing much is going to change for the next five years with short lived, shallow recessions being an expected part of that landscape. In addition to the worst economic conditions since the Great Depression, we are presently dealing with the near collapse of what have been traditionally strong equipment leasing categories such as construction and transportation, and the resultant collapse in collateral resale values across a wide range of industries. Now add in the unprecedented levels of devaluation in real estate as a once reliable structuring enhancement and you have the perfect storm of 2009.

Setting the Stage in 2009

The year ahead is shaping up to be a year of clearing debris before we can rebuild. Everyone is naturally attentive to the horizon, anticipating the first signals of a revival and a return to the good old days. It’s in our nature as Americans to be looking for our next turn at bat, even though we went down swinging the last time we were at the plate. Realistically, we face the challenge of working off a doozy of a hang-over from a huge debt binge while tasked with finding and burying casualties, triaging the wounded and clearing the wreckage before we can start a recovery. At roughly the mid point in the year, anyone who thinks we are half-way done with the job, I would courteously classify as a consummate optimist. Our key asset markets (real estate, equipment, lease & loan portfolios, etc.) are still staggering through valuation limbo, and the powerful new global, social and demographic factors discussed above, are setting their roots and shaping a new economic playing field for us to figure out. After we get through the first steps of cleaning up the mess and righting the institutions and engines of commerce, we will still be challenged with deciphering an as yet unseen blueprint for a strong and sustainable US economy in the context of a new world social order. I defer to the economic experts to sort out the just where the next “up” cycle begins, but I’m pretty sure it’s not this year.

A Prescription for Forward Progress

I’m not a pessimist. I have no doubt we will emerge from the other end of this current challenge economically, socially and intellectually stronger as a country. Likewise, I believe the broker market will emerge, albeit somewhat more refined as a population, to lead as they always have, in getting things going again, finding the investment opportunities for capital one small nugget of business at a time. I do believe however, that at least for the short term, brokers and their funding relationships need to close ranks and start working and thinking strategically about the future as a team. The process includes attention to discerning the best prospects for leasing in this new economy. How does this strategic partnership best capitalize on the impending market growth in energy, medical, agriculture, infrastructure, etc. going forward? The funding sources are more likely to have the resources for the mining portion of this exercise, and brokers are best suited to take the plan to the street, but both need to be seated at the planning table.

The new credit model for everyone will likely deal as much with a customer’s future as with his past. There will be more weight assigned to the client’s type of business and A/R aging, with greater emphasis on available working capital and current assets. We will have to learn to listen more closely to the client’s view of his future for the next twelve months, his current backlog of work and the strength of his customers and related contracts. A review of the client’s financial information will start with the most recent 3 to 6 months of results, and the information will have to be very recent. Until the economy finds new footing and some regularity, lenders will be wary of categories of trade that are recession sensitive in nature, i.e. categories of business that depend on highly discretionary consumer spending.

For the time being, successful brokers need to think strategically in terms of marketing and selling what they can get funded, instead of trying to fund what has been sold in the past. Stop trying to squeeze the same old round pegs into the new square holes. Quit trying to convince funding sources that the world hasn’t changed. Many of the brokers we work with, demonstrating their enduring entrepreneurial nature, have embraced this essential strategic adjustment. Some have not. It just makes good sense to retool one’s approach to the market when faced with a near decimated field of funding sources, with each survivor offering a shrinking credit window.

Brokers can benefit from thinking like they have equity in the deal. Lately, lenders have been seeing more push back from some brokers on credit declines. The perception seems to be that a lender’s credit fear is irrational, and the broker simply has to talk him or her out of their fear. This kind of thinking can only be indulged in out of view of the monthly growth in number and aging of delinquencies, write-offs and deteriorating collateral values.

It has become clear to us just how many of our broker sources have people selling for them with little or no credit training, let alone credit responsibility in their careers. Kit Menkin mentioned in one of his recent articles how credit scoring and automated decisions in credit made it possible for hundreds of people to enter our industry with little or no knowledge of credit. The time has come however, at least for the next few years, for everyone to learn enough about credit to work more effectively with their funding relationships. Steve Kiley with Fifth Third Leasing summed it up in a recent article for the Monitor. Steve wrote: “An organization should expect it’s sales people to be the important first link to the credit underwriting process…If you have sales people...who don’t fully accept or aren’t qualified to take on this role… then you have two options…get them trained or get rid of them.”

Better yet, get equity in the deal. One could make a very strong case for the idea that the survivors in the broker segment will be the ones who step up and take a financial stake in the business they want to place. Admittedly, now is not the ideal time to be shopping for bank relationships, or to get started building one’s own portfolio, but there are still banks out there interested in hearing from us. Like everything else in a “down” market, it just requires a little more work to find that bank. Many regional and community banks are still fundamentally strong and ready to lend in the equipment finance category, if for no other reason than to ease the pain of their hemorrhaging mortgage portfolio. Short of going it alone with a bank, there are programs available to help brokers make the transition to “Lessor”. The Trapezium Program from Orion First Financial for instance, creates an excellent gateway for this transition. These programs help brokers take an equity stake in a portfolio and get a taste of the good as well as the bad results of their credit decisions.

One certainty is that sources of money for the foreseeable future will be relatively conservative. Whether it’s the equity investor or the bank behind the funding source, leverage is precious and the days of reckless money are past. Access to funding will require some skin in the game and better knowledge of credit. From a marketing perspective the survivors of this new reality will be the brokers and funding sources who are the first to clear the remains of last year’s collapse and build a new platform for cooperation. They will be the ones who learn to work together strategically to jointly position themselves for success and smartly, to capture and control the rich new market opportunities that will be forthcoming.