Slow economy affects leasing

Slow economy has affected leasing, with tighter restrictions coming into play
By Susan Nord, SBT Reporter
Local leasing experts agree, leasing activity has slowed down with the rest of the economy and, because of the tightening economy, it may be harder to obtain a lease than even last year as creditors increase their scrutiny on deals.
“Volume is definitely less than a year ago, but there is business out there,” said Mike Cornell, vice president of Associated Bank and the man in charge of its leasing division. “After Sept. 11 there was a lull for a couple of weeks, but the volume has been down in general. It’s nothing like the last two years.”
Some leasing companies are now running into problems because of lax qualification standards in the bullish economy of the late 1990s. According to Lawrence Elton, president of Advantage Leasing Corp., some leasing companies didn’t require financial statements for “small-ticket items” such as leases for $50,000 or even $100,000.
“The industry was going along making decisions with less and less information,” Elton said. “One thing we have done — and we never really played that game [of no financial statements] anyhow — but we are requiring more information that we would have in the past.”
Bankers and others funding leases may get a little nervous if clients with leased equipment start defaulting on their payments, leaving the financial institutions with equipment with potentially no secondary market.
“I’m very lucky because we don’t have much in terms of repossessed equipment,” Cornell said. “Right now, I’ve got a few computers, but I’ve heard comments made about banks and lenders getting stuck with equipment. We’ve been fortunate.”
Elton says the accelerated depreciation on assets to the point where some equipment may get pennies on the dollar is a fact of life in the leasing industry. “We’re underwriting the credit-worthiness of the business more than the equipment and, in most cases, the credit-worthiness of the owners of the business, too,” Elton said.
On the plus side for Elton is that the slowdown has come mostly in the form of new business generated where Advantage has rejected as many new lease agreements as they’ve accepted in terms of volume.
“We really haven’t seen a negative impact on our portfolio that would relate to the [economic] slowdown in terms of people slowing down their payments,” Elton said. “That hasn’t been a problem yet, although it would be fair to anticipate that it will be.
“But so far, so good.”
Who leases?
The Equipment Leasing Association (ELA) released the results from a recent study conducted by Dun & Bradstreet on what makes companies more likely to lease assets. Called the 2001 Propensity to Lease Study in which Dun & Bradstreet devised a Propensity to Lease (PTL) index, the study examines the relationship between a company’s probability to lease and its industry, size, age, geography and payment behavior.
The study reveals how firms’ PTL distributes among the key business attributes, how it has changed over the past six years relative to them, and how it benchmarks against other US businesses.
The model was developed using data from approximately 13 million US businesses, comprehensive databases from UCC filings, and leasing company-provided trade data. The resulting index provides insight into the marketplace and allows lessors to accurately define their business initiatives and target their most profitable prospects.
Highlights of the study include:
— Regardless of ticket size, the Public Administration, Manufacturing, Wholesale, and Transportation industries show a higher propensity to lease.
— The Manufacturing and Wholesale industries are the most attractive market segments for equipment leasing, given a higher propensity to lease.
— Large companies, with 500+ employees, are more likely to lease than other firms are.
— Older companies (in business for 10 or more years) are more likely to lease than other firms and make up 57% of the total lease amount. In contrast, new companies (less than three years in business) account for only 3% of the total lease amount.
— Older and more established companies (companies in business for 50 years or longer) have the lowest delinquency rates among all age groups, followed by the youngest companies. Companies between three and 10 years old have the highest delinquency rates.
— High-risk companies, as reflected by their delinquency and default scores, are more likely to lease than other firms are, although the relationship is not linear. This observation was true in 1995 and remains so, but to a lesser extent in 2000.
To learn more about the leasing industry go to ELA’s Web site at www.elaonline.com. To request a copy of the PTL study, contact Kristina Boehk at 202-944-5181 or e-mail her at kboehk@hillandknowlton.com.
November 9, 2001 Small Business Times, Milwaukee