In February this year I attended the 2017 Alta Group Equipment Leasing & Finance Industry Summit in the United States, a think tank discussing the future of equipment finance.
Alta Group, the organiser, is a global leader in equipment leasing and asset finance, and at the forefront of industry research and experience. And while the US market was a major part of the discussion, the implications for the Australian market were abundantly clear.
So here are the big takeaways as I see them.
Geopolitical change has created some economic uncertainty.
This year’s summit theme was “Adapt or Business as Usual?”, which felt like the perfect question to be asking. 2016 was a year of unprecedented and sometimes totally unexpected geopolitical change, and as the dust settles on Brexit and Trump, businesses everywhere are starting to take stock of the economic implications.
Equipment finance providers are no exception. The strength or otherwise of the economies in which we operate affect the businesses we service, but also own businesses. And few businesses are so truly local that changes to global trade would not affect their ability to grow.
Interest rates are also key to business growth. The cost of capital is one of the fundamental drivers of growth in equipment finance – and a rising cost of capital should mean growth in demand for finance. The US Federal Reserve has already started raising rates in the US, and indicated that they will continue to do so. This is good news. On the one hand because the Fed has made the decision to normalise rates based on strengthening economic indicators, and on the other because finance providers typically benefit from higher lending rates.
US businesses see plenty of upside, but some challenges as well.
US participants at the summit were asked a series of questions about their views on the economy and their business prospects looking forward, their answers gave a true insight into how they see the future of equipment acquisition and financing.
Many businesses were conscious of the effects on their businesses of what they termed ‘wild cards’ on numerous fronts. The wave of populism which saw Trump elected, the UK exiting the Eurozone and the rise of the National Front in France is widely seen as a significant headwind to the existing liberal, free-market international order, with far-reaching social as well as economic consequences which are difficult to quantify.
At the same time, few saw Trump’s isolationist trade policies as good news for their businesses. When asked about the potential effect of the US leaving global trade agreements and/or taking a firmer stance with China, nearly 44% felt economic growth would be hindered, and 50% felt uneasy but wanted to wait and see.
However, it wasn’t all bad news. Despite the potential drag from the isolationist policies of the Trump administration, many felt that a business-friendly federal administration would bolster business investment and economic growth.
And while 2016 may have been marked by overall negative growth in capital spending on equipment and software investment (both in Australia and the US), over 80% of businesses felt that better employment data as well as rising incomes and higher business confidence would translate into renewed enthusiasm by business owners to make capital investment in 2017.
At the same time, when questioned whether this enthusiasm for capital investment was likely to translate strongly into growth in financed equipment acquisitions, so that growth in financed equipment acquisitions would outstrip overall economic growth, 50% weren’t sure, and only 37% felt that it would.
It’s clearly a question of wait and see.
What does this mean for equipment finance in Australia?
According to East & Partners’ 2017 Outlook, like the US, 2017 will see a return to credit demand. As interest rates rise in the US, they are likely to start rising here as well-meaning businesses will feel more pressure on capital as the cost of that capital increases, and their capacity to purchase equipment outright falls.
The benefits of equipment finance, namely the ability to bundle costs into a fixed predictable payment and retain capital to invest, should become more obvious and important.
On the downside, a pull-back in global trade instigated by the US is not good news for Australian industry. Add to that the on-going demise of the mining boom, and there’s no question that equipment finance volumes will continue to drop as the transition from mining-led growth continues. And despite some stronger economic data, construction, agriculture and manufacturing all remain subdued.
On the other hand, other industries are growing, and the time may have come for Australian equipment finance providers to look further afield than their traditional areas of growth for new sectors, particularly medical equipment and technology for example.
What are Australian equipment finance businesses telling us about the future?
According to the same research by East & Partners, Australian businesses are saying that their capital expenditure forecasts are soft, and that cash flow and working capital constraints are crippling, particularly for small business.
This is good news for equipment finance - 80% of businesses said that the underlying factor driving demand for equipment finance is cash flow needs, and they expect financing volumes to increase by 7% in 2017.
But more importantly, what are our customers telling us they want?
More Australian businesses may be open to the benefits of equipment finance but what do they want from that provider? What they are telling us is that they want far more than the provision of credit alone. Easier transaction execution, faster credit approval, better management of credit requirements, and competitive pricing are a given, but what they are really looking for is guidance and insight.
The digital revolution and advances in technology mean that our customers are more educated and more informed than ever before. They also have access to more choice. It’s a great outcome – but it can also create headaches. This is because increased choice also means increased complexity. The challenge of knowing which choice to make, which product to choose, which business to trust – these are the dilemmas our customers are faced with every day. And it’s something we believe we should be able to help them with.
The bottom line? Equipment finance is changing
If we are to continue to help our customers to grow their businesses and thereby grow our own, we need to embrace innovation because of what it offers our customers in terms of flexibility, convenience and efficiency. The availability of fintech providers as an alternative method of financing and the ability of equipment finance providers to offer managed solutions which align costs with business demands will be markers of success.
If there was one thing to come out of the summit in Dallas, it’s that equipment finance is changing. If we are to adapt to this change, continue to grow and evolve our business, we must be prepared to see our role as so much more than simply providing credit. Our customers should also be our partners – partners whom we help make the best capital purchase choices, and the best financing decisions to fund those choices.