As the recession wanes, most industry insiders agree that new opportunities will present themselves for profitable revenue-producing projects. New machinery and equipment will be needed and our industry will stand ready to prospect these companies. Will the lenders be there? That is the question I have posed and it is for you the reader to determine how we are going to handle this business.
Here is what some of our colleagues have answered.
Tom Moore of Baylore Acceptance Corporation of Burlington, Canada thinks it will be difficult for lenders to deal with the realities of the recession. “We typically have looked at the trend of the last three years and assume it will continue. It will be up to us to show how a company managed through these times. Did they bury their head in the sand or did they manage their way through it? I think it will be even harder to show restarts that failed were too influenced by external pressures more so than poor management. Good analysis, vision and a gut feel for picking winners will be the next challenge. “
Certainly we will need to do a much stronger analysis and understand the philosophy of the lenders whom we use.
“Have you had any success getting companies funded that lost money in 2008?” asks Bob Teichman, CLP, of Teichman Financial Training. “Since almost everyone is in the same boat, I think the answer you will hear from financial statement funders (as I have) will be ‘t depends.’ I have only been able to get deals done for companies that were "A" credits before the 2008 loss and are now showing strong signs of recovery.”
Brian Carey thinks the answer is in story credit lenders. “In the recovery mode there will be investors looking to get back into the market now that things seem more settled. Rates will be high, but a well thought-out credit write-up with good structure should go a long way in getting these credits approved. I got one company approved two months ago that went bankrupt in 2005. In regards to banks, with the discount rate at 0-.25%, banks are getting plenty of margin on solid credits even with good rates to the customer. Why take the risk?”
“If banks don’t give customers a mulligan for 2009, it might be a ripple effect in the financial market as a whole. We're seeing banks tighten as the year goes on, rather than loosen up,” says Chris Richardson of MTC Equipment Finance.
Ralph Mango of RPM Associates is quite concerned. “First, how many of these lenders of any quality have held these receivables for their own account, after years of being able to securitize them? The lending approach to the very issues you raise are different when you are underwriting to own. Secondly, with the fed so much more involved in 'shadowing' risk management, something we are not used to, how willing are underwriters to lend into the very scenarios you mention? It has been interesting to hear of the president and Geithner brow-beating the banks into taking more risk when it was this very approach that got us here in the first place.”
“I maintain that as you look at lending to small businesses, the deal frequently hinged on the personal creditworthiness of the principals,” says Mango. “With those personal fortunes equally diminished, on what basis is the decision now made? Investors remain on the sidelines until some positivity translates into a more accommodating risk lending environment. Banks who lend to leasing and equipment finance companies have tightened the eligible receivable requirements as well. When investors DO return it is reasonable to expect that their return requirements will drive the costs of funds to a higher level that strikes at the ability of the borrower to cover those increased costs. Finally, the cost of the new healthcare requirements pose an unforeseeable but higher cost to businesses when the bill in its final form takes hold. How many small businesses will be forced to shutter operations as a result?”
Among our colleagues there is much concern about how we are going to pull out of this financial morass. There is worry that a second round of non-lending will be taking place due to the financial condition of potential borrowers. I think we are going to see higher rates and, for those small businesses who have access to credit card lines of credit, that will be a potential source.
Finally the old order of lending within the leasing industry has started to drastically change. It is not hard to believe that such changes will continue to be made, making the life of a lessor and broker more difficult and increase the importance of becoming more disciplined in understanding the needs and financial condition of its applicants.
Having been in the equipment leasing industry for most of my adult life I have seen many downturns in the economy and have lived through the recessionary times. During each such event lessors have closed, funders have exited the business, merged or gone out of business themselves, and new funders have entered seeing opportunities. The business continues to move on. After each event rules have been revised, new rules formulated and loopholes closed. But, be sure, those brokers and lessors who have stuck to the fundamentals, done their proper due diligence, understood the needs of their customers, vendors and funders and have contained their overhead have always survived. It is expected that the same will be true when we are through this cycle.