Banking and Equipment Finance

As we approach the anniversary of the collapses of Silicon Valley Bank and Signature Bank, Monitor explores how the resulting turmoil in the banking industry has impacted equipment finance. Will banks continue to dominate this industry or are their days numbered?

Banks have been steadily increasing their presence in equipment finance over the years via mergers and acquisitions and by hiring experienced leadership teams. When the Monitor 100 launched in 1992, U.S. bank affiliates contributed 17% of the ranking’s net assets. Today, the share of banks is 52.9%, but will banks continue to dominate the industry?

Skyrocketing Interest Rates

The regional banking industry faced myriad challenges in 2023. Many agree that the Federal Reserve’s decision to raise interest rates 11 times between March 2022 and July 2023 set the stage for turmoil.

“The interest rate environment has had a disproportionate impact on banks depending on balance sheet positioning and business model,” Dave Drury, senior vice president and group head, Equipment Finance at Fifth Third, says. “In general, higher rates have tightened liquidity broadly and increased the cost of borrowings. This has placed greater emphasis on ensuring strong returns on capital, which, combined with tighter liquidity conditions, has impacted lending.”

When interest rates increase, Monitor Editorial Board member Vince Belcastro notes that the “weakest of borrowers” are often hit the hardest, which impacts their financials and can lead to defaults or covenant violations designed to restrict the amount of debt the borrower can carry or how much interest can cover. The higher interest rates go, the more struggling borrowers become exposed, forcing banks to reevaluate and re-grade their credit portfolios, which, in turn, affects bank credit quality ratings and reserve requirements.

In 2023, S&P Global lowered the ratings of nine banks, revised the outlooks of five banks to negative and revised outlooks to stable for four banks which were previously rated positive.

Deposit Dilemma

When the credit quality and rating of a bank’s portfolio drops, its capital requirements increase. Belcastro says banks in this situation face a trifecta of hurdles, including increasing reserve dollars, improving their overall credit ratings and facing the increasing cost of capital.

From Q4/22 to Q1/23, deposits decreased by $472.1 billion at U.S. banks, marking the largest decline reported by the FDIC in the history of its data collection. As economist Dr. Elliot Eisenberg mentioned in a recent livestream event, the excess pandemic cash that consumers and businesses had been saving for a rainy day was quickly consumed due to rising inflation.

“Deposits are critical to a healthy banking franchise, and a strong stable deposit base can ensure consistent lending in all business environments,” Drury says. “Banks with well diversified, stable deposit bases tend to be more resilient and consistent in various business cycles and under stress.”

Meanwhile, according to the FDIC, the cost of deposits has continued to increase faster than loan yields, despite steadily increasing net interest margins since 2022.

“To be sure, across the banking sector, the rate environment has led to a greater focus on building or retaining deposits; there has also been significant pressure on net interest margin, and we’ve seen the reports where some companies are reevaluating portions of their bond portfolios that were underwater,” Will Perry, executive vice president and group head, Regions Equipment Finance, says. “All that said, as we look back on 2023, with only the very few exceptions we saw back in the spring, the nation’s banks have proven themselves to be resilient and well capitalized.”

“When regulators come in, they look at loan-to-deposit ratios,” Belcastro says. “Yes, their loan-to-deposit ratios have gone down, but deposits as a whole are still stronger than pre-pandemic. Despite the fact that deposits are still higher than pre-pandemic levels, they’re definitely lower than they were six months ago.” Belcasto notes that this trend, coupled with potentially increased lending and investing activity can cause lowered loan-to-deposit rations, which, in turn, can constrict lending activity.

S&P Global Ratings predicts that deposits will continue their descent until the Fed reaches the end of its quantitative tightening, meaning depositors will require higher yields to avoid making further withdrawals.

Reserve Requirements

Designed to preserve liquidity, reserve requirements were officially mandated in the U.S. when the National Bank Act passed in 1863. Today, the Fed uses these requirements as a component of monetary policy.

“Banks must maintain a buffer of liquid assets to offset potential outflows under times of stress,” Drury says. “The amount of this buffer is quantified by banks’ internal stress testing process, which is subject to regulatory review under Regulation YY. Since the bank failures in March [2023] and given tighter liquidity conditions, banks are carrying larger liquidity buffers out of caution. This demand to hold more capital and liquidity in this environment does impact a bank’s ability/willingness to lend.”

Effective March 26, 2020, in response to the COVID-19 pandemic, the Fed reduced reserve requirements to 0% to provide banks with more liquidity to lend. As deposits rolled in, increasing by 21.7% in 2020 — the largest jump in nearly 80 years — banks were flush with cash. While many initially pulled back investment in 2020, as evidenced by a 13.9% year-over-year drop in originations in 2020 by Monitor’s Bank 50 ranking, the group quickly got back in the lending game and increased equipment lease and loan volume by 6% in 2021.

“Without question, I expect [reserve requirements] to be a source of continued discussion and debate in the industry moving into 2024 and beyond,” Perry says. “And I believe across the financial sector, you’re seeing companies becoming more selective about where they are deploying capital for a variety of reasons.”

Banking Breakdowns

When it came to deploying capital during the deposit boom of the pandemic, some, such as Silicon Valley Bank, chose to invest overflowing deposit coffers in treasury bonds, traditionally viewed as low-risk investments with lower yields. As interest rates rose, SVB’s treasury bonds became less attractive to investors, which caused them to drop in value. Meanwhile, as inflation hit record highs, the bank’s technology startup clients began tapping into their deposits. To meet its capital needs, SVB began selling investments, resulting in a $1.8 billion loss for the bank that caused its stock prices to plummet.

We all know what happened next. Five U.S. banks — including equipment finance player, Signature Bank — failed in 2023, sending shockwaves around the globe and causing banks to reevaluate their investments.

Some, like Belcastro, argue that heavy reliance on cryptocurrency deposits at Signature Bank and SVB led to challenges; regulators disapproved of crypto deposits, which led to an imbalance in loan-to-deposit ratios and insolvency issues.

Regardless of their root, Paul Vecker, chief revenue officer at Eastern Funding, says the bank failures sparked panic in many depositors, leading them to withdraw funds, which impacted the ability of smaller banks to lend.

“You started seeing a lot of lenders pull back on their ability to lend because their capital base has been depleted by the depositors leaving,” Vecker says. “And that hasn’t changed. And quite frankly, I don’t know what these small to mid-sized banks are going to do to try and bring depositors back in.”

Despite the ongoing press about the situation, Perry does not believe that the recent bank failures directly affected the equipment finance sector. “Remember, the banks that failed had very different business models than most other banks,” Perry says. “Most banks are built around a diversified business model that reaches a large range of clients, whereas the banks that failed focused largely on just a few core types of clients. In my experience, clients looking for equipment financing have turned to banks with diverse business models. And those banks are still operating from a position of strength today.”

Impact on Customers

Ultimately, banking turmoil has affected many customers over the last year. Vecker believes the series of interest rate hikes led to a “paradigm shift” in the market.

“We, as the equipment finance company, are no longer able to say to our customers, ‘This is what your interest rate is going to be regardless of when your deal closes,’” Vecker says. “Because in an environment where an aggressive Federal Reserve is taking unprecedented action to quash inflation, you have too much volatility to try and hold rates beyond a day or two.  If you did, you are taking on a lot of rate risk, which could destroy any margin you have in the deal.”

To further complicate matters, Vecker says -certain markets continue to deal with ongoing supply chain challenges, which complicate equipment orders, leading to uncertain delivery times and oftentimes preventing manufacturers from providing final sale prices.  This creates the dual challenge of both equipment price uncertainty and rate uncertainty occurring at the same time.

To address this uncertainty, Vecker’s company began to offer insurance designed to lock in interest rates and eliminate at least one of the two new risks in the market. But insurance is merely a band aid on greater issues at hand.

Economic Headwinds

Although the U.S. economy remained resilient in 2023, S&P Global predicts its strength will be tested this year as the actions of the Fed continue their ongoing ripple effect. Economists continue to speculate about when the Fed will begin to lower rates. S&P suggests two possibilities: 1) when disinflation moves closer to the Fed’s goal of 2% and 2) when unemployment numbers begin to rise.

At its January 2024 meeting, the Federal Open Market Committee decided to hold steady on rates, and with the consumer price index landing higher than expected in January, a decision to lower rates at the next FOMC meeting in March seems uncertain.

“We’re starting to see the impact of hyper-inflation and 18 months of interest rate increases on the economy,” Vecker says. “And so, credit departments at banks are starting to be significantly more cautious about the type of lending they do. You can’t ignore the environment.”

If this weren’t enough, The Alta Group notes that the resulting geopolitical tension of two ongoing wars is contributing to the uncertainty of many equipment finance leaders. Additionally, indicators of potential economic slowdown and concerns about a recession have led to the tightening of lending standards.

S&P forecasts that delinquencies and charge-offs will continue their upward trajectory, heading close to historical averages in a slow growth environment of limited economic growth, with continued decreases in deposits, coupled with pandemic-induced stress in commercial real estate.

Commercial Real Estate Exposure

Many companies have struggled to get employees back in the office after the COVID-19 pandemic, and the repercussions have hit the commercial real estate industry hard. As of November 2023, U.S. banks held approximately $3 trillion in CRE debt.

Sparked by rising concentrations of CRE loans in the early 2000s and lessons learned from bank failures in the 1980s and 1990s, the FDIC, Federal Reserve Board of Governors and Office of the Comptroller of the Currency published guidance on the concentration of CRE loans. Banks with 1) “construction loans surpassing 100% of risk-based capital,” 2) total “CRE loans above 300% of risk-based capital” and 3) “50% growth in CRE over the last 36 months” were all considered risky. In June 2023, 483 banks exceeded guidelines in category one and 1,020 surpassed guidelines in categories two and three.

Traditionally, owner-occupied CRE loans have performed slightly worse than non-owner occupied CREs, but in 2020, that trend reversed and delinquency rates for non-owner occupied CREs have continued to rise ever since. The portfolios of many well-known banks active in the equipment finance sector, including Western Alliance, Wells Fargo, CIBC, BankUnited and Citizens Financial, made the list of the top 25 U.S. banks by highest non-owner-occupied CRE concentration in Q3/23, according to S&P Global.

Fitch Ratings expects the quality of CRE loans to continue deteriorating into 2025, with office properties leading the downward charge. Fitch estimates that loan delinquencies for U.S. commercial mortgage-backed securities will double in 2024 and reach almost 4.9% by 2025.

In the aftermath of last year’s banking collapses the Wall Street Journal reported that the SEC is doubling down on some community and regional banks regarding their CRE exposure and watching intently to ensure that these losses do not create a repeat of the Great Recession.

As commercial real estate and commercial equipment finance are often linked in the organizational structure of some banks, how will this impact the industry?

Long-Term Outlook

The whirlwind of post-COVID financial industry trends has already created repercussions for banks in equipment finance. Belcastro notes that banks are likely to continue to adopt a more conservative approach to capital management, potentially reducing their involvement in equipment finance and commercial lending in general.

Some U.S. Bank Affiliates with significant equipment finance portfolios, like Key Equipment Finance, have already scaled back operations. Over the next few years, Belcastro says banks may decrease their lending and leasing activities, impacting their share in the equipment finance industry.

Vecker points out that one of the challenges that equipment finance subsidiaries of banks have is that often, a fair amount of their business is done with customers that have no other relationship with their parent bank: “Often our only relationship with the customer is through an equipment finance transaction. We don’t generate fee income on ancillary products or bring deposits in. So as a consumer of the bank’s precious capital, we better be able to return that capital at a higher rate than other lending products where the bank can enjoy a broader relationship with that customer.  As a highly specialized lending product, we have been able to provide that superior return to the bank and  expect to continue to be able to do that in the future.”

Drury does not expect banks to pull back from equipment finance: “There may be some individual circumstances as we’ve already seen; but, broadly, I don’t see banks pulling back from what I like to call the ‘core’ equipment finance market, which is doing traditional lease and loan products as generalists, with select asset and/or industry specialization and a focus on its clients and prospects in the markets it serves.

“My personal view is that, with the industry being a $1 trillion sector, banks that choose to compete in the space must have a viable equipment business in order to compete effectively.  As someone who has helped build a de novo equipment finance business for a bank, I also think there will continue to be opportunities for banks to continue to build domain expertise in this space leveraging talent that may become available from elsewhere.”

Perry believes fewer banks will be entering equipment finance: “I see the trend slowing considerably within the banking sector in 2024. The reason for this, in my view, is a combination of the current economic climate and the work the acquiring banks are doing to organically build on the growth they’ve experienced since enhancing their equipment finance capabilities in recent years. I believe 2024 and likely a good part of 2025 will be exciting times that will present a great deal of strategic opportunity.”

And for banks already in equipment finance, Perry believes balance sheet strength will determine a bank’s staying power: “There will be, and already have been, institutions that have scaled back, which will position others for greater opportunity. Our customer-centric approach at Regions Equipment Finance has been in place for decades and has allowed us to serve our bank partners and existing clients with specialized guidance and industry expertise.”

As many banks have reduced their equipment finance offering to a mere product offering, The Alta Group has identified the opportunity present for independents and captives in the industry to capture market share.

Impact on Syndications

Banking turmoil also made a material impact on syndication, as an exit of players coupled with increased pricing and credit approval is putting a damper on a once-thriving market.

“Syndication has absolutely been impacted,” Drury says. “As banks deem their capital to be more precious, each has had to make decisions on how to best allocate that capital. Some banks have pulled back or exited their buy desks entirely, which has an obvious impact on the syndication marketplace, changing the dynamic in the investor pool many syndication desks have traditionally relied upon. That said, our industry has demonstrated over time to be exceptionally resilient, and I expect others will step in to fill any void created by some banks’ decisions in this area.”

Belcastro predicts that private credit funds may fill this gap, playing a more significant role in syndications, which could potentially lead to higher borrowing costs for equipment finance clients.

“If disciplined and used correctly, there’s great utility for equipment syndication, especially during times of turmoil and change,” Perry says. “This agility enables banks to strategically divest of or acquire assets in large quantities, generating income, manage industry and sector collateral while prudently managing credit risk. Interest rates influence banks’ desire to sell assets out of their portfolios. Depending on the interest rate, divestitures may result in losses.”

Predictions

Assembled from the wisdom of the industry experts interviewed and publications researched for this article (with perhaps a bit of crystal ball scrying thrown in for good measure), Monitor has assembled a non-comprehensive list of predictions for equipment finance in the year ahead:

1. Interest rates will go down. Everyone is anticipating the arrival of lower rates in 2024, but no one knows the exact day or hour whence they will come (except maybe the Federal Reserve Board of Governors).
2. We may still have an economic downturn. Economists have been predicting a downturn and hinting at a recession for a while now, but neither has materialized…yet. “We’re seeing storm clouds,” Vecker says. “I do think portfolios are going to be tested over the next year.”
3. The Monitor 100 will shift. As banks merge, sell off portfolios and exit equipment finance, the Monitor 100 rankings will tell the story. As independents and captives seize a larger slice of the pie, Belcastro says the current challenges in the banking industry may lead to a temporary shift in the proportion of banks’ share in the equipment finance industry.
4. Capital constraints will continue. As banks become more strategic in their deployment of capital, they may focus on reducing their portfolios, which Belcastro notes may impact investment for years to come.
5. M&A will increase. The Alta Group predicts that the M&A environment will improve in 2024 as banking conditions change, with regional banks merging for economies of scale and seasoned leadership teams becoming available to create new entrants.
6. Collaboration with private credit funds will increase. Private credit funds could take on a greater role in equipment finance as banks sell assets to these funds, allowing them to service clients without holding assets on their books. Belcastro notes that borrowers might face higher borrowing costs because of this shift.

Equipment Subscriptions

 

The equipment finance industry is adapting to a trend that has transformed the rest of the economy: subscriptions. Procurement managers started using software as a service two decades ago to avoid the upfront cash outlay of a purchase and bundle products and services into one arrangement. Now the equipment finance industry is embracing the concept as an alternative to a basic loan or lease.
  
Procurement and budgetary constraints
 
One of the main value propositions for equipment finance subscriptions is that they provide procurement flexibility to customers who do not have the capital budget to buy expensive assets but may have the operational leeway for a subscription.
 
For example, consider a facility manager at a factory, power plant, or data center who is accountable for performance. They may need to meet a high standard of uptime. But the current equipment is aging, inefficient, expensive to maintain, and not dependable. Unfortunately, the manager does not have the capital expenditure budget required to buy new equipment that is necessary to meet the performance standards. For that manager, subscriptions can be a life saver.  The equipment finance company can retain ownership of the asset for the facility manager. The subscription allows them to obtain the new equipment along with long-term O&M service and pay for all of it through their operational budget.
 
Plus, subscribing to an asset doesn’t mean the customer can’t own it. There are situations where it makes sense for ownership to transfer to the customer after the subscription term. If the equipment has additional life and is performing well, the procurement manager might not want to give it back at the end of the subscription term.

 Convenience

 

One of the most persuasive arguments in favor of subscriptions is convenience. With subscriptions, the equipment owner can bundle together all related expenses to simplify contracts, maintenance, and finance for the subscriber. For example, procurement, licensing, and maintenance can all be rolled into one monthly payment and contract, saving time for people across departments on the customer side.
 
Asset life expectancy
 
The final factor to weigh when considering subscriptions is the life expectancy of the equipment. Some assets perform for many years after an initial subscription term and are therefore favorable to own. Other technologies are rapidly evolving. Customers will want the next best thing to improve performance and avoid technological obsolescence. In those cases, customers will seek subscriptions that allow them to upgrade as the technology evolves.
  
What’s important is that you know what factors to consider — and that your lender has the flexibility required to accommodate your different needs.

Proactive Customer Financing Programs Work!

 

CUSTOMER FINANCING PROGRAMS LEVERAGE MORE SALES

 

A proactive implementation of customer financing programs enables industrial automation sales organizations to increase sales by providing  clients with an easy, simple, affordable, convenient and hassle-free methodology to purchase their products and services by aligning monthly payment to project/investment Return on Investment. 

Financing programs create differentiation from your competitors to focus client attention on VALUE instead of COST while overcoming BUY NOW objections related to: Limited Working Capital, Budget Issues, Inability or Unwillingness to access current bank and credit lines. 

Financing Programs enable larger, higher ticket and more robust and profitable transactions: 

·         * All Project Costs

·         * Extended Warranty & Maintenance Costs

·         * Long Term Subscriptions including MaaS, RaaS and SaaS

·         * Section 179 Tax Treatment

Contact Dean Morrison for additional information and to determine how your company can successfully implement a customized financing program to leverage more sales.

 Dean Morrison

e. domorrd@outlook.com

m. 954-224-3390

w. https://dimensionfunding.com/industrial-automation-fl/

The 2023 Section 179 Deadline is Approaching

 The 2023 Section 179 Deadline is Approaching

Estimated reading time: 5 minutes

Well, the summer months are in the rearview mirror, and we are in the final quarter of 2023. The leaves are changing colors, the weather is cooling, and friends and families will get together to celebrate the holidays. But did you know that beyond its aesthetic appeal, the year’s final months present a unique opportunity for small businesses like yours?

We are referring to Section 179, which lets businesses deduct the cost of qualifying new or used equipment. As a business owner, understanding Section 179 of the Internal Revenue Code can be overwhelming, but this Balboa Capital blog article can help. In it, you will learn how this tax deduction works and how to elect it before the December 31, 2023 deadline.

What is Section 179?

The Section 179 tax deduction is a valuable small business tax deduction that allows you to deduct the total cost of qualifying equipment, vehicles, machinery, and software purchased or financed during the 2023 tax year. Section 179 was created to encourage business owners to invest in their companies by providing accelerated depreciation benefits.

This deduction can reduce your taxable income dollar-for-dollar, resulting in significant savings come tax season. It’s important to note that unlike regular depreciation methods, which spread out deductions over several years, Section 179 allows you to deduct the entire cost upfront.

Section 179 deduction limit for 2023.

In 2023, the Section 179 deduction limit for eligible equipment purchases is $1,160,000, and the phase-out threshold is $2,890,000¹. For example, suppose you purchase or finance $50,000 in qualifying office furniture, equipment, and computers for your business before the December 31, 2023 deadline. In that case, you can write off the total amount for the 2023 tax year.

If you purchase or finance more than $2,890,000 worth of qualifying equipment in 2023, your deductions will decrease dollar-for-dollar after you exceed the phase-out limit. Let us use a construction company to illustrate how the phase-out limit works. The company financed $3,250,000 of heavy equipment and storage structures in 2023. As a result, the company is $360,000 over the phase-out limit, and its deduction would decrease by this amount.

Bonus depreciation will decrease in 2024.

Bonus depreciation is similar to the Section 179 tax deduction in that it offers an immediate expense deduction. However, the primary difference is that bonus depreciation lets you deduct a percentage of qualifying equipment upfront while, as mentioned earlier, Section 179 enables you to deduct a specific dollar amount. Bonus depreciation applies to many types of new and used equipment with a useful life of up to 20 years.

In 2023, the bonus depreciation amount is 80% and is scheduled to decrease to 60% in 2024. So, if you procure qualifying equipment in 2023, you can deduct a higher percentage of the purchase price on your 2023 tax return, provided you put the equipment into business use before the deadline. For example, a $70,000 equipment purchase in 2023 would have a first-year depreciation of $56,000 ($70,000 x 80%). If the $70,000 equipment purchase is made in 2024, the first-year depreciation is $42,000 ($70,000 x 60%).

Some states have different tax rules.

Not every U.S. state conforms to the Tax Cuts and Jobs Act provision that allows businesses to elect bonus depreciation for qualifying equipment purchases². Additionally, Section 179 does not apply in U.S. states with no corporate income tax, and certain U.S. states conform with different deduction limits³.

If you have questions about Section 179 or want to determine if a particular type of equipment qualifies for a deduction, consult an accountant or attorney. They can make recommendations based on your business’s needs and inform you of your state’s Section 179 and bonus depreciation rules and limits.

The Section 179 deadline is December 31.

As we approach the New Year, you will navigate through various challenges that often characterize the year’s final quarter. You will undoubtedly be busy juggling employees’ vacation schedules, stocking up on inventory, organizing your holiday sales, and taking the steps necessary to finish the year strong. But that doesn’t mean you need to put off investing in new or used equipment that can benefit your business.

You can claim an immediate deduction by purchasing or financing qualifying equipment and placing it into business service before midnight, December 31, 2023. Not only is this an effective financial strategy, but it is also an operational strategy that can help set the stage for success in 2024. Newer, more up-to-date equipment can help increase productivity and set your business apart.

How to elect the deduction.

To elect the Section 179 tax deduction in 2023, you must purchase or finance equipment that qualifies for the deduction and complete Internal Revenue Service (IRS) form 4562. It is important to note that the deduction is not automatic. Just because you invested in eligible equipment does not mean you can get the tax deduction — you need to elect it and provide the correct paperwork on your tax return.

References:

1. https://www.blockadvisors.com/resource-center/small-business-tax-prep/section-179-expensing/
2. https://tax.thomsonreuters.com/en/glossary/bonus-depreciation
3. https://www.thebalancemoney.com/depreciation-deductions-for-state-taxes-398930

Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses H&R Block/Block Advisors, Thomson Reuters®, Internal Revenue Service (IRS), or The Balance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Section 179 limits and information on the Balboa Capital website are for illustrative purposes only; the Section 179 limits and information provided are subject to change by the IRS. Please visit the IRS website or consult a qualified tax professional for confirmation of the current Section 179 limits and information related to your situation.

 

 

Dean Morrison

Balboa Capital, A Division of Ameris Bank | Director Business Development
(O) 949.553.3408 | (M) 954.224.3390 | (E) dean.morrison@balboacapital.com

Q3 Update From Equipment Leasing and Finance Foundation

 

Q3 Update to 2023 Economic Outlook Forecasts 0.9% Expansion in Equipment, Software Investment

July 19, 2023, 07:25 AM Filed Under: Equipment Leasing & Finance Foundation

High interest rates and slowing economic growth will continue to impact equipment and software investment growth as the year progresses, according to the Equipment Leasing & Finance Foundation’s Q3 update to the 2023 Equipment Leasing & Finance U.S. Economic Outlook. The report revealed that economic growth in Q1 was stronger than initially estimated, leading the Foundation to raise its annual U.S. GDP forecast to 1.6 percent. However, after investment contracted in the first quarter — and with a potential recession still looming on the horizon — the Foundation revised its annual estimate for equipment and software investment growth down slightly, to 0.9 percent.

The Foundation's report is focused on the $1.16 trillion equipment leasing and finance industry and highlights key trends in equipment investment, placing them in the context of the broader U.S. economic climate.

Nancy Pistorio, Foundation Chair and President of Madison Capital LLC, said, “The U.S. economy posted surprisingly solid growth in Q1, and labor markets have been unexpectedly resilient to higher interest rates. Additionally, after a poor first quarter for equipment and software investment growth, it appears that the segment may have picked up a bit in Q2, and several of the Foundation’s forward-leaning Momentum Monitors are in a better position today than they were earlier in the year. Nevertheless, as the report makes clear, the economic tide still looks to be going out: core inflation is still above target, financial stress is rising, and labor markets are likely to weaken substantially later this year as the effect of high interest rates sets in. While a so-called ‘soft landing’ is still possible, a mild recession beginning by year’s end is still the most likely base-case scenario.”

Highlights from the Q3 update to the 2023 Outlook include:

• The U.S. economy has been stronger than anticipated driven by a robust labor market and resilient U.S. consumers. Inflation has improved but remains above target, and a looming credit crunch and slower global economic growth remain significant headwinds.
• Equipment and software investment growth is struggling amid volatile industry conditions at the midway point of 2023 after decreasing by 4.5 percent in Q1. Although conditions may have improved somewhat in Q2, they are far from ideal. As a result, the annualized growth forecast for equipment and software investment is just 0.9 percent.
• The manufacturing sector’s measures of activity have held firm in recent months with solid production and sales in Q2. However, several leading indicators point to weakness later this year, including reduced demand from abroad, though the recent boom in manufacturing construction is a notable exception that should continue.
• Main Street has held its own during one of the most turbulent periods in recent economic history. However, a growing share of small firms are reporting weaker sales, tepid capital investment plans, and rising borrowing costs. The looming credit crunch expected later in 2023 is likely to disproportionately impact small businesses.
• The Federal Reserve held interest rates steady at its most recent meeting, the first such pause in the current tightening cycle. However, Chair Powell and the FOMC have made it clear that their work is not done and that additional rate hikes are likely later this year.

The Foundation-Keybridge U.S. Equipment & Software Investment Momentum Monitor, which is released in conjunction with the Economic Outlook, tracks 12 equipment and software investment verticals. In addition, the Momentum Monitor Sector Matrix provides a customized data visualization of current values of each of the 12 verticals based on recent momentum and historical strength. This month one vertical is expanding, five are recovering/emerging, and six verticals are weakening. Over the next three to six months, year over year:

• Agriculture machinery investment growth is likely to remain in negative territory.
• Construction machinery investment growth will decelerate.
• Materials handling equipment investment growth will likely remain subdued.
• All other industrial equipment investment growth is likely to remain muted.
• Medical equipment investment growth should improve.
• Mining and oilfield machinery investment growth may slow, but should remain positive.
• Aircraft investment growth will continue to slow.
• Ships and boats investment growth could decelerate sharply.
• Railroad equipment investment growth may decelerate, but will likely remain positive.
• Trucks investment growth may weaken but should remain positive.
• Computers investment growth could begin to bounce back.
• Software investment growth will continue to decelerate but should remain positive.

The Foundation produces the Equipment Leasing & Finance U.S. Economic Outlook report in partnership with economic and public policy consulting firm Keybridge Research. The annual economic forecast provides the U.S. macroeconomic outlook, credit market conditions, and key economic indicators. The Q3 report is the second update to the 2023 Economic Outlook, and will be followed by one more quarterly update before the publication of the 2024 Economic Outlook in December.

Download the full report at https://www.leasefoundation.org/industry-resources/u-s-economic-outlook/.

Download the Momentum Monitor at https://www.leasefoundation.org/industry-resources/momentum-monitor/.

 

6 Reasons Equipment Vendors Offer Financing

Equipment vendors must close deals to grow, expand, profit, and stay competitive in their respective markets. Sales provide the revenue needed to cover expenses, pay sales managers and support staff, and reinvest in the business. Plus, sales allow vendors to build customer relationships that may result in repeat business and increased loyalty. For these reasons, business-savvy vendors offer financing options to their customers, which is a proven way to increase sales and add value to their companies.

Offering financing to customers presents equipment vendors and their customers with other benefits. To learn what they are, keep reading this Balboa Capital blog article. It features six reasons why equipment vendors offer financing.

Makes equipment acquisition easy for customers.

Offering customers an easy, flexible purchase option is one of the most important reasons to provide financing. Prospects who visit your showroom or lot have a good idea of what they want, and presenting them with custom-tailored financing options and repayment terms can help you and your sales managers close deals.

If you don’t offer financing, the path to purchase will lengthen because prospects will need to crunch numbers and decide how to buy the equipment based on their financial situation. Additionally, prospects might take their business to a competing vendor that sells equipment with financing options.

Helps businesses procure equipment quickly.

Small businesses need the right equipment to stay competitive and boost profits and market share. In some cases, companies need to procure equipment right away. For example, if a critical piece of equipment malfunctions or breaks down, it can disrupt production and negatively affect the bottom line. Fortunately, equipment financing solutions provide a fast and efficient way for businesses to access capital quickly and easily.

It is an ideal solution for those who want quick access to capital without the hassle of long wait times or complicated paperwork. If financing is part of your product offering, customers won’t need to look for an outside lender, and they can quickly secure funding to finance the equipment you sell.

Boosts customers’ buying power.

Business owners who finance equipment often spend more than they initially budgeted for. The reason is that financing can give business owners more buying power than a one-time cash purchase. As a result, they can finance newer and more feature-filled equipment with higher price points.

So, by offering financing, your vendor business can attract more customers who would otherwise be unable to purchase higher-priced equipment due to budgetary concerns or financial constraints. You and your sales team can close more significant deals while your customers outfit their companies with leading-edge equipment.

Increases customer loyalty.

Offering financing options to customers can be a great way to increase customer loyalty. Presenting financing solutions to your customers when they are ready to move forward shows that you put their needs first and have everything covered.

You and your sales team members can provide more personalized services that meet your customers’ specific needs, particularly financing-related ones. This helps create a sense of trust between you and your customers, leading to increased loyalty and long-term customer relationships.

Offers more convenience to customers.

Today’s business owners wear many hats and are busy managing their day-to-day tasks. So, they want the convenience of an efficient financing process when investing in business equipment. If your vendor business is a one-stop shop for equipment purchases, financing, and customer support, your customers will be afforded optimum convenience. Customers can peruse your showroom or lot to evaluate your inventory, select the equipment they want, and apply for financing on the same visit.

Next, you can provide customers with more convenience by working with a business lender specializing in equipment vendor financing. Some lenders can expedite funding swiftly for approved deals with their own application, borrowing requirements, and credit-scoring technology.

Helps generate repeat business.

Customer retention is vital for any equipment vendor business that wants to improve its bottom line. It is about keeping customers happy and loyal and creating a steady revenue stream for the company.

By offering convenient financing solutions to customers, you can establish your vendor business as a preferred resource for the equipment you sell. This can lead to increased sales, repeat purchases, and referrals. Of course, all of these sales translate to increased profits.

What to look for in a business lender.

You have many options if you want to add financing to your list of services. There are direct business lenders that service equipment vendors, many of which have a national footprint and industry expertise.

When evaluating lenders, some things to consider include their time in business, reputation in the market, typical approval rates, lending power, and speed of funding. In addition, some lenders provide their vendor partners with marketing support, such as private-label financing applications.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Section 179 2023

 

Section 179 is a Sales Tool For Vendors

One effective sales tool that forward-thinking equipment vendors deploy is the Section 179 tax deduction. Vendors mention the myriad benefits of this tax incentive to customers, which often helps reduce the path to purchase and results in more sales. In this Balboa Capital blog post, you will learn more about Section 179 and how you and your salespeople can use it to close more deals and increase profits.

What is Section 179?

Section 179 is a federal tax deduction that allows businesses to deduct the total or partial purchase price of qualifying equipment, vehicles, machinery, software, and other tangible assets on their tax returns with Internal Revenue Service (IRS) Form 4562. Not all assets are eligible for the deduction, so business owners must consult an accountant to confirm.

In 2023, the Section 179 tax deduction limit is $1,160,000, and the phase-out threshold is $2,890,000. Plus, bonus depreciation is 80% for equipment placed into service from January 1, 2023, through December 31, 2023.1 As you can see from these numbers, Section 179 presents business owners — your customers — with an opportunity for some tremendous deductions come tax time.

Make Section 179 part of your team’s training.

Your equipment vendor business can maximize profits and sustain long-term success with the right strategies. In addition to your business-to-business (B2B) marketing initiatives and website, you should have internal strategies for educating and training employees. This can ensure that your salespeople have extensive knowledge of the equipment you sell and its benefits and features.

You can’t assume that everyone on your staff understands what Section 179 is and how it works. Therefore, it would be advantageous if one of your employee training sessions featured an overview of Section 179 and how it benefits your end-user customers. When your salespeople understand this tax deduction, they can mention it to customers and feel confident answering questions about it. Moreover, they will realize how it can help them close more deals.

It will also help if you send an email to your salespeople that features a brief explanation of what Section 179 is, how it works, and what the current year’s deduction limit is.

Putting it into action on the sales floor.

Every vendor salesperson has a way of interacting with customers and helping them choose the best equipment for their business’s needs and budget. Customers will typically be interested in the equipment’s features, benefits, and capabilities and how much it costs. Equipment warranty, delivery, and installation, if applicable, are also talking points.

Most business owners are familiar with expenses that can be deducted from their taxable income, such as marketing, business insurance, legal fees, and rent. But regarding business equipment, they might not be fully aware of the potential deductions under Section 179. That said, you and your salespeople should mention Section 179 after you have covered the equipment’s features, benefits, and price, and your customer is nearing the finish line with their purchase.

If you mention Section 179 right when your customer enters your showroom or lot, you might sound pushy or desperate for the sale. It is best to welcome them and let them know you are available if they have questions about the equipment you sell or need advice and recommendations. Take your time, and don’t rush your customers through the buying process.

Over time, you will have a good sense of when to bring up Section 179. For some customers, it might be during the initial discussion about the equipment they are interested in, and for others, it might be at the point of purchase.

Conclusion

Section 179 can be a great sales tool for your equipment vendor business, as it incentivizes customers to purchase the equipment you sell. By mentioning Section 179 and its benefits, you and your salespeople can make the equipment more attractive to potential buyers while helping them save money on their taxes. Just advise customers to contact their business accountant if they need more information about Section 179 and how it applies to their business.

Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the Internal Revenue Service (IRS) or Hourly, Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.