Lenders face special challenges in 2020, driven by 3 primary trends
he economic impacts of the 2020 COVID-19 crisis have impacted equipment lenders as well as contractors: In 2019, new business loan volume grew 10.5 percent in the equipment finance industry. However, construction loan delinquencies grew 24 percent in Q1 2020 as the toll from COVID-19 became evident, translating to $3.67 billion in delinquent loans. Construction loans have alsodecreased over 3 percent from the previous quarter and since 2019.
These headwinds mean lenders, finance companies, and banks face special obstacles, including:
- Increasing incentives for borrowers: Equipment buyers are erring on the side of caution, and to mitigate risks, many equipment buyers plan to extend the life of existing equipment while looking for deals to appear (e.g. fire sale prices) for new equipment. Many dealers and manufacturers have offered deals, including deep discounts on capital equipment, lower interest rates, and cash discounts.
- Deferrals are growing: Deferrals for lessees could easily translate into delinquencies. To address this challenge, many banksoffer fee waivers, deferred payments and other accommodations to assist lessees. These conditions could result in a flood of defaults. Equipment lenders should equip themselves with a solid understanding of residual equipment values in case the loan conditions change quickly.
- Rental volumes threaten new loans: To hedge their bets against the future, construction owners are shifting their mix of owned versus rented equipment. This shift toward rental will limit the origination of new loans and loan volumes for lenders. Although the rental market was already growing at an annualized 5 percent, the pressures from COVID-19 only increase the likelihood that contractors will hold onto used equipment longer, and that rental volumes may reduce the demand for new equipment loans.
What can finance companies do to strengthen their position?
The good news is that recovery is on the horizon. Including a recent return in construction machine activity to similar levels as the same time in 2019, a surge of construction activity could continue in late 2020, driven partially by low interest rates and liquidity being injected back into the market.
However, lenders need to be proactive and think like their customers to thrive in uncertainty. Steps to take include:
- Determine how to deal with reduced demand and reductions in loan volume. Since lenders are often at the mercy of what contractors and lessees tell them, lenders should gain better, direct knowledge of equipment economics including usage, trends and future values. For example, what impact does a flood of contractor bankruptcies have on residual equipment values? EquipmentWatch can provide these value curves through subscriptions, market data and via custom data projects.
- Work with contractors to better understand their position. Understanding future uncertainties for each of your lessees can help you anticipate specific challenges and address them proactively. Getting a solid grasp on factors by market segment can help lenders anticipate potential hurdles and build contingencies.
Success in this environment requires that lenders be informed and deliberate. Although many of the worst impacts from the current crisis are temporary, trends such as rental demand will continue to change the equipment financing industry. To understand moreabout these and other current issues finance companies and lenders face, check out EquipmentWatch’s article in Equipment Finance Advisor, “No One Was Ready for This”. EquipmentWatch’s research-driven report, “Future-Proofing the Construction Business”, alsooffers data-driven insights into concrete actions to take to position for success in any environment.
Brand Marketing, EquipmentWatch