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Equipment Finance Sector Expected to Surpass $740 Billion in 2013
U.S. businesses and government agencies will finance more than $742 billion in equipment acquisitions in 2013, according to the U.S. Equipment Finance Market Study 2012-2013, recently released by the Equipment Leasing & Finance Foundation. The study, conducted by IHS Global Insight, provides a comprehensive look at the size and expected growth of the U.S. equipment finance market.
According to the study, the equipment finance sector has emerged from the Great Recession with finance volumes at an all-time high, as a result of double-digit growth in equipment investment and a favorable interest rate environment. However, equipment finance volumes are expected to expand at a more moderate pace over the next 12 to 18 months as equipment investment growth remains constrained by uncertainties at home and abroad. Companies are expected to remain cautious about taking on the risks associated with large capital investments until after important tax and regulatory decisions impacting short- and long-term fiscal stability have been made.
On a more positive note, technological innovation and equipment replacement needs should spur rapid growth in volume in late 2014 and beyond.
Survey Summary
- In 2012, equipment finance volume returned to pre-recession levels and the 2012 estimate for the equipment finance market is $725 billion. The current IHS macroeconomic outlook and the 2012 Foundation borrower survey suggest the equipment finance market will expand over the next two years; however, the growth rate will slow.
- The equipment finance sector is a significant contributor to capital formation in the U.S. economy. Of the projected $1.3 trillion to be invested in plant, equipment and software in 2013, 55% ($742 billion) of that investment is expected to be financed through loans, leases and lines of credit. In 2014, the market size is projected to grow by $36 billion to $778 billion.
- According to the 2012 survey, 72% of firms used at least one form of financing (excluding credit card use). Companies with less than $1 million in revenues used financing in only 49% of their equipment acquisitions, while companies with revenues between $25 million and $100 million used financing in 86% of their acquisitions.
- Bank financing dominated the market. This increase in share reflects banks' low cost of funds, which provides organic growth, as well as the challenges many independent finance companies faced during the downturn. Banks were the primary lenders across all equipment types in 2011, with the smallest penetration in trucks and trailers. Medical equipment financing shows a significant shift from manufacturers to banks from 2006 to 2011.
- Between 2006 and 2011, banks actively moved their new financing volume to companies with lower risk profiles. The share of bank financing of highly profitable companies rose from 26% to 47% between 2006 and 2011, while the share of bank lending to unprofitable companies declined from 65% to 53%.
- The share of cash payments declined for large companies from 2007 to 2012 as larger companies have enjoyed greater access to credit markets. In the current low-interest-rate environment, financing equipment acquisitions is especially attractive.
- Companies with sales between $25 million and $100 million doubled their share of leasing volume from 2006 to 2011. Companies with less than 51 employees also doubled their share of equipment acquisition via leasing in this time period. This may be in part a reflection of the difficulty in obtaining other forms of credit for these segments of the market.
- Even though the overall share of computer hardware financing has declined, there has been an increase in the share of leasing of computer hardware acquisitions. The share of leasing of software acquisitions has also increased as captives have rolled out more financing programs and independents are increasingly attracted to this asset class.
- The share of financing in furniture and fixtures acquisitions has risen dramatically from 40% in 2006 to 83% in 2011. The increase is likely due to a greater propensity to bundle furniture and fixtures purchases as well as additional “soft costs” such as delivery, warranty, etc., with other financed assets.
- Larger companies are more concerned with the pending elimination of off-balance-sheet financing. This may be due to large companies having a greater propensity to make large-ticket acquisitions that are often financed through off-balance-sheet structures.
- Corporate perceptions of the economic outlook are the primary driver behind business investment decisions. Small companies have the greatest degree of concern about general economic conditions.
- In the 12 months following the survey, 30% of companies anticipate increasing their equipment investment. Large companies disproportionately represent this group of companies. For example, among companies with sales over $100 million, 51% indicated they would increase spending, yet only 17% of businesses with sales less than $1 million had similar plans.
Conclusion
Business investment spending for equipment and software is expected to slow over the 2013 and 2014 period. Although there will be pockets of strength, overall finance volume is not expected to keep pace with total investment during this period. Small businesses, which represent more than half of the volume of equipment finance, are expected to curtail spending. According to the IHS macroeconomic outlook, sometime during 2014 as business uncertainties begin to wane and the prospect of higher interest rates looms, larger firms may be inclined to draw on their cash reserves to acquire equipment. This adjustment would contribute to finance volume growth trailing the overall growth in equipment investment.
The U.S. Equipment Finance Market Study 2012-2013 draws on data from a number of sources, including the Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices, the Federal Reserve Flow of Funds, the 2012 Monitor 100, the Equipment Leasing and Finance Association's 2012 Survey of Equipment Finance Activity, the IHS Equipment Market Monitor, and surveys conducted by the Foundation. A key input came from a custom survey of businesses that purchased equipment in 2011. The survey was conducted in August and September of 2012. Responses were collected from 427 businesses, of which 372 acquired business equipment in 2011. For the purposes of the study, equipment financing refers to retail or end-user financing of equipment and software. The financing market estimates reflect lending to businesses and government agencies. The study is available at www.LeaseFoundation.org.
U.S. businesses and government agencies will finance more than $742 billion in equipment acquisitions in 2013, according to the U.S. Equipment Finance Market Study 2012-2013, recently released by the Equipment Leasing & Finance Foundation. The study, conducted by IHS Global Insight, provides a comprehensive look at the size and expected growth of the U.S. equipment finance market.
According to the study, the equipment finance sector has emerged from the Great Recession with finance volumes at an all-time high, as a result of double-digit growth in equipment investment and a favorable interest rate environment. However, equipment finance volumes are expected to expand at a more moderate pace over the next 12 to 18 months as equipment investment growth remains constrained by uncertainties at home and abroad. Companies are expected to remain cautious about taking on the risks associated with large capital investments until after important tax and regulatory decisions impacting short- and long-term fiscal stability have been made.
On a more positive note, technological innovation and equipment replacement needs should spur rapid growth in volume in late 2014 and beyond.
Survey Summary
- In 2012, equipment finance volume returned to pre-recession levels and the 2012 estimate for the equipment finance market is $725 billion. The current IHS macroeconomic outlook and the 2012 Foundation borrower survey suggest the equipment finance market will expand over the next two years; however, the growth rate will slow.
- The equipment finance sector is a significant contributor to capital formation in the U.S. economy. Of the projected $1.3 trillion to be invested in plant, equipment and software in 2013, 55% ($742 billion) of that investment is expected to be financed through loans, leases and lines of credit. In 2014, the market size is projected to grow by $36 billion to $778 billion.
- According to the 2012 survey, 72% of firms used at least one form of financing (excluding credit card use). Companies with less than $1 million in revenues used financing in only 49% of their equipment acquisitions, while companies with revenues between $25 million and $100 million used financing in 86% of their acquisitions.
- Bank financing dominated the market. This increase in share reflects banks' low cost of funds, which provides organic growth, as well as the challenges many independent finance companies faced during the downturn. Banks were the primary lenders across all equipment types in 2011, with the smallest penetration in trucks and trailers. Medical equipment financing shows a significant shift from manufacturers to banks from 2006 to 2011.
- Between 2006 and 2011, banks actively moved their new financing volume to companies with lower risk profiles. The share of bank financing of highly profitable companies rose from 26% to 47% between 2006 and 2011, while the share of bank lending to unprofitable companies declined from 65% to 53%.
- The share of cash payments declined for large companies from 2007 to 2012 as larger companies have enjoyed greater access to credit markets. In the current low-interest-rate environment, financing equipment acquisitions is especially attractive.
- Companies with sales between $25 million and $100 million doubled their share of leasing volume from 2006 to 2011. Companies with less than 51 employees also doubled their share of equipment acquisition via leasing in this time period. This may be in part a reflection of the difficulty in obtaining other forms of credit for these segments of the market.
- Even though the overall share of computer hardware financing has declined, there has been an increase in the share of leasing of computer hardware acquisitions. The share of leasing of software acquisitions has also increased as captives have rolled out more financing programs and independents are increasingly attracted to this asset class.
- The share of financing in furniture and fixtures acquisitions has risen dramatically from 40% in 2006 to 83% in 2011. The increase is likely due to a greater propensity to bundle furniture and fixtures purchases as well as additional “soft costs” such as delivery, warranty, etc., with other financed assets.
- Larger companies are more concerned with the pending elimination of off-balance-sheet financing. This may be due to large companies having a greater propensity to make large-ticket acquisitions that are often financed through off-balance-sheet structures.
- Corporate perceptions of the economic outlook are the primary driver behind business investment decisions. Small companies have the greatest degree of concern about general economic conditions.
- In the 12 months following the survey, 30% of companies anticipate increasing their equipment investment. Large companies disproportionately represent this group of companies. For example, among companies with sales over $100 million, 51% indicated they would increase spending, yet only 17% of businesses with sales less than $1 million had similar plans.
Conclusion
Business investment spending for equipment and software is expected to slow over the 2013 and 2014 period. Although there will be pockets of strength, overall finance volume is not expected to keep pace with total investment during this period. Small businesses, which represent more than half of the volume of equipment finance, are expected to curtail spending. According to the IHS macroeconomic outlook, sometime during 2014 as business uncertainties begin to wane and the prospect of higher interest rates looms, larger firms may be inclined to draw on their cash reserves to acquire equipment. This adjustment would contribute to finance volume growth trailing the overall growth in equipment investment.
The U.S. Equipment Finance Market Study 2012-2013 draws on data from a number of sources, including the Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices, the Federal Reserve Flow of Funds, the 2012 Monitor 100, the Equipment Leasing and Finance Association's 2012 Survey of Equipment Finance Activity, the IHS Equipment Market Monitor, and surveys conducted by the Foundation. A key input came from a custom survey of businesses that purchased equipment in 2011. The survey was conducted in August and September of 2012. Responses were collected from 427 businesses, of which 372 acquired business equipment in 2011. For the purposes of the study, equipment financing refers to retail or end-user financing of equipment and software. The financing market estimates reflect lending to businesses and government agencies. The study is available at www.LeaseFoundation.org.
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