On a percentage basis, US capital-equipment and software sales outpaced overall GDP growth in 2020, thanks substantially to enterprises looking for ways to blunt the impact of the coronavirus pandemic. So says the Equipment Leasing & Financing Association in its yearly outlook report.
“It’s encouraging to see economic strength, especially in the midst of a significant public-health emergency, but the financial strength of business-equipment financiers is tied to the whole economy,” says Elena Ionenko, co-founder and head of operations at TurnKey Lender, a leasing-, financing-, and lending-technology maker. “That’s why it’s useful to mention some caveats about this particular ELFA report.”
To start, Ionenko points out that the ELFA’s late-2020 report was composed when:
- The outcome of the 2020 presidential election was still in dispute (if not in actual doubt)
- The size of the first 2021 stimulus package, which will be significant, wasn’t known
On the downside, though the vaccination rollout seems to be ahead of schedule, Ionenko notes that public-health officials have voiced “some concern about states re-opening too soon” and triggering another surge.
Bigger picture, the ELFA report gives equipment makers and distributors a snapshot of a rapidly changing business culture, “Where extraordinary opportunity in the form of a newly emergent economy propelled by pent-up demand intersects with extraordinary innovation, twenty years in the works, by financial-technology companies,” says Ionenko.
The worst may be over
Looking forward, and with the worst of the pandemic’s economic impact possibly “in the rearview mirror,” the Washington, D.C.-based ELFA says the short-term prospect remains cloudy, with an “uneven” recovery expected as some sectors faring better in 2021, and others expected to struggle until most people get vaccinated by about mid-year.
For example, medical equipment financing, which outpaced 2019 growth by 13% in 2020 (maybe no surprise in light of the pandemic) is seen continuing last year’s surge through June 2021 at least. Meanwhile, financing for mining and oilfield machinery slipped back 19% year over year in 2020 may be in for a milder recovery, and it’s partially dependent on “widespread vaccine distribution,” says the Equipment Leasing & Financing Association.
Total Equipment and Software investment started 2021 on the heels of an extraordinary surge — a 46.9% increase on an annualized basis — in the third quarter of 2020. But it’s important to note that this late-year surge came after an “unprecedented” 28% drop in Q2 2020.
Trouble on the home front?
We enter the second quarter of 2021 against a backdrop of tightening credit criteria that began with the pandemic lockdowns in 2020. More than a third of US banks raised commercial and industrial lending bars, and even more — nearly half — tightened standards for commercial real estate loans.
“Wait and see” seems to have been the watchword for businesses turning into the New Year, with 35% of banks reporting weaker demand for commercial and industrial loans from large companies, and 45% reporting less demand from small businesses.
Consumers, whose finances impact many aspects of the equipment-lending space, face a mixed scenario in 2021. “On one hand, bankruptcies remain near historic lows, largely due to debt relief programs and trillions of fiscal stimulus at the onset of the pandemic,” says the Equipment Leasing & Financing Association. By mid-November 2020, for example, consumer bankruptcies were down 39% year over year. But the Mortgage Bankers Association says the rate of home loans that were “seriously delinquent” went from 1.7% in Q1 last year to 5.2% by the end of September.
A few months can make a big difference
So, despite generally positive signs on the consumer bankruptcy front, “there are signs of rising financial stress due to falling wage income, which is down 0.9% from February” 2020, the ELFA report says, citing the US Bureau of Economic Analysis. More alarmingly, the ELFA cites the Census Bureau finding that in mid-November a third of US households “faced eviction or foreclosure” in the next two months.
“Again, hindsight is 20/20,” says Ionenko. “We know now that the mini-stimulus, the second of three so far, came late in the last administration, and that a third stimulus package has been signed into law, presumably putting the economy on a firmer footing, and giving equipment financiers more scope for growth in 2021.”
Much depends on the vaccine
Covid’s impact on business was “quite low,” according to the ELFA report, with commercial and industrial loan delinquencies rising in late 2020 to 1.3% — high for recent years, but nowhere near as bad as in the “housing crisis” years between 2007 and 2011.
Loans to businesses and consumers rose in tandem last year — spiking in March and April as enterprises and households looked to boost available cash reserves in the early days of the pandemic.
What’s in store for loan volume through the first half (at least) of 2021 is a function, says the ELFA report, of whether “restrictions on businesses continue to depress economic activity.”
The pandemic has hurt some industries and helped others, impacting their need for capital equipment and supplies. Notoriously, leisure and hospitality are down, with 46% fewer locations open for business on a specific day in January 2021 compared to the same date a year earlier. For businesses in retail and transportation, the date-to-date comparison shows and 22% decline.
FinTech as a competitive enhancement
Even in retail, results were mixed. Many mom-and-pop players went bust in 2020. Meanwhile, established online retailers like Amazon and Walmart prospered as consumers avoided in-person shopping — possibly adding to their rosters of habitual customers. Hotels, restaurants, bus lines, and airlines did pretty miserably across the board.
Residential real estate also reflected a division. While year-over-year existing-home sales overall were robust in 2020, this activity was skewed toward properties going for $500,000 and up — a sign, in other words, of a K-shaped recovery, says the ELFA study, citing the National Association of Realtors.
“When we put the ELFA report in context, filling in some of the blanks with occurrences subsequent to its publication, we’ve got a picture of a business environment in flux,” says TirnKey Lender’s Ionenko. “Business-equipment manufacturers and distributors have to navigate carefully in periods of rapid change like the one we’re experiencing right now, but they should also know that financing technology is primed to help them serve more customers, in virtually any location, with unprecedented efficiency and security.”
Adds Ionenko: “Equipment and supply providers need help right now — and it’s available to them if they can find the right fintech partner.”
Schedule a personalized demo of TurnKey Lender to see what the company’s crediting automation can do for the bottom line of your business.