Capital Improvements: From the Economy to Rising Interest Rates, Lessors Chart the Lending Market

It would not be surrendering to hyperbole to characterize 2018, at least through the first three-quarters of the year, as wildly successful from a selling standpoint across the office technology universe.

In fact, every dealer spotlight we’ve conducted this calendar year is replete with testimonials that speak to record-breaking sales. Small sample size or not, it would be difficult to find a strong consensus to the contrary.

As a compendium to this month’s state of the industry focus on 21st-century sales, we have assembled a roundtable of key members of the leasing and financing community to discuss the 2018 lending environment, the conditions that have impacted dealers’ and end users’ ability to obtain funding and how changes in the economy and market conditions should impact the landscape in 2019.

Our panel consists of the following representatives of leasing and financing institutions: Rob Parker, senior vice president, Wells Fargo Equipment Finance, Office Technology Group; Michael D’Errico, director, equipment finance, Office Imaging Unit, CIT Group; Robert Hunter, senior vice president, U.S. Sales, DLL Financial Solutions; Jennie Fisher, senior vice president and general manager, Office Equipment Group, GreatAmerica Financial Services; and Nick Capparelli, managing director, LEAF Commercial Capital.

During 2018, what have been some of the primary drivers behind the leasing and financing markets?

Parker: It is always interesting to take a closer look at the trends in our mature but ever-evolving industry. The most dominant drivers are the move from a low-rate environment and the overall impact of technology advancements and product mix as hardware becomes less prominent.

With pricing, we see some pressure as rates increase from historically low levels. There are a lot of finance options for dealers today, and everyone has a slightly different strategy. Leasing companies with the strongest focus on delivering long-term support at a competitive rate will likely have better results.

The technology side of the equation is having an impact on a couple of fronts. It not only relates to the average transaction size, but also the mix of equipment, software, and services included in today’s deals. As a result, there is a need for more flexible contracts while still balancing other factors.

An additional driver related to technology is the need to ensure investments help dealer productivity. Whether it’s integrating with third-party products or improving legacy systems, it’s critical to make long-term investments to differentiate the market approach.

D’Errico: Given the market penetration today, many dealers are focused on expanding the range of products and services they can offer to new and existing customers. This puts a high premium on knowing your customers well enough to truly understand their needs. If done successfully, it can result in bundling of solutions and services with the hardware. It also requires that leasing companies be clearly aligned with their dealer’s strategy so they can effectively execute the concept, i.e. clear and effective invoicing.

Robert Hunter, DLL Financial Solutions

Hunter: The growth and migration towards a usage and consumption environment continues to gain traction among businesses in the U.S. and across the globe. What we are experiencing is the “consumerization” of business procurement decisions. We lease and use many products in our consumer lives, and this trend is making its way into B2B purchasing decisions. The only effective way to use or consume a product or service is through a lease or finance agreement that offers flexible payment solutions aligned with usage needs and budget restrictions. Not to mention the lowering of total cost of ownership (TCO), where leasing eliminates the burden of ownership for the business. Connected technology improves and changes so rapidly that companies are now realizing that the only efficient way to manage technology capital expenditures is to lease or finance the equipment. According to a 2017 IDC survey, over 75 percent of customers expect a financing option when making these decisions and will rule out vendors who do not offer them.

Fisher: Banks continue to be flush with cash and the current lending capacity remains strong in the short term. Confidence stemming from liquidity in the marketplace, the tax law change and a strong economy with extraordinarily low losses are encouraging finance companies to be much more aggressive in their pricing and credit appetite. The office equipment space has generally performed well, which is one reason banks remain very active in this space.

The times we are experiencing are cyclical—we have seen it before and we will see it again. We seem to be at the top of the cycle and dynamics will change.

On the borrowing side, all of the above are fueling capital investments and purchases remain strong.

Nick Capparelli, LEAF Commercial Capital

Capparelli: Obviously, a strong economy and a lot of pent-up demand for new equipment and upgrades have played a big role in increased end-user business this year, as have federal interest rate increases and talk of increases to come. As you’d expect, dealers are responding with plans to expand, whether by adding locations, staff, inventory, fleet, etc. or through acquisitions. And what we’ve seen is that one of the biggest pain points for these dealers is sourcing capital to support these activities. Some are winding up with a kind of fragmented, patchwork financing/capital solution delivered by various parties that may or may not understand the dealer’s industry, markets and so on. There’s an opportunity here for finance providers who do understand the business to step up and offer an integrated, coordinated source of customer equipment financing, plus capital to support growth plans across the enterprise.

When assessing sourcing options (leasing/financing specialist, a bank or manufacturer captured unit), what variables should an office equipment dealer take into consideration?

Capparelli: Many finance companies will highlight things like credit acceptance rates, turnaround times, and funding speed, but I think a dealer should expect that from any finance partner. However, a variable that’s often underappreciated is whether a finance partner has sufficient resources to not only handle a dealer’s needs now, but also as they expand their enterprises and as their needs evolve in this rapidly changing market. I’d look especially for the ability to go beyond equipment financing to offer a true partnership with capital to support other growth plans, such as acquisitions. It’s also important that a financing team has deep knowledge of the industry in order to be an effective resource in helping dealer principals drive long-term sales growth and increased enterprise valuation.

Jennie Fisher, GreatAmerica Financial Services

Fisher: Understand how your financing source makes its money. It is easy to get fixated on pricing and the enticement to increase upfront funding with a low (and in today’s market, a “no interest”) rate. However, it is important to remember that no finance company intends to be a “not-for-profit” organization and you do not want them to be. You need to ensure you are partnering with a financially strong and sustainable finance organization who will be around for the long term to service you and your customers. Finance companies will maintain their overall profitability one way or the other; make sure you understand the fees and expenses that your customer will incur throughout the term of the contract, and what the end of term will look like for both of you. If your finance company gives you a rate that seems too good to be true, take the time to understand how they can afford to do that.

Ensure you feel good about their ethics, integrity and flexibility in their ability to serve you. Do they see you as their primary customer, or your customer as their primary customer? Do they say what they do and do what they say? Do they have the ability to demonstrate flexibility to deliver “out-of-the-box” solutions for your needs?

Make sure they place high priority on customer care and accessibility. Are they delivering the customer experience that you and your customers deserve? Will they help you keep your customers for life by providing this stellar experience?

Do they know your business and the market you are in? What does their involvement in the office equipment industry look like? Do they understand the opportunities and challenges office equipment dealers face today? Are they building relationships with industry partners to create synergy in bringing integrations and solutions that help dealers continue to successfully grow their organizations?

Hunter: Office equipment dealers should pay close attention to the experience the lessor has in the dealer channel, the type of products and services the lessor offers to the dealers’ customers and a holistic understanding of end-of-lease options. For example, does the lessor know how to structure managed services contracts that help the dealer realize revenue upfront, while ensuring the customer has a simple, easy-to-understand bundled invoice? Finally, the dealer should consider how much investment the lessor makes in products and services that support the dealer and customer experience, like online credit applications, lease management and access to reporting and fleet management tools.

Michael D’Errico,
CIT Group

D’Errico: Dealers should look to choose financing sources that can meet their short-term objectives and also support their long-term vision. They need to service their customers properly in the present, but also have the financial flexibility to invest in their future, so that they can continue delivering value throughout the life of the customer relationship. An example is FlexAbility, CIT’s invoicing and servicing platform, where we continue to invest in the innovation needed to meet dealer needs now and into the future.

Parker: This industry has more financing sources than ever, and it can be challenging to assess the different options. Clearly, price is an important consideration, but it’s also critical to evaluate the level of support a dealer will receive throughout the customer life cycle. An important question to ask is whether your financer makes an investment in your relationship that allows you to be more productive in other facets of your business.

Given the slow growth in the market, customer retention is also critical. What tools does your financer provide to help you retain your customers? What about finding new customers? The most comprehensive financial institutions offer dealers dynamic prospecting tools that consolidate information from a large number of sources. For example, at Wells Fargo Equipment Finance, we offer a tool that delivers more accurate and deeper information about prospects to help dealers increase their win-rate. A relationship with a financial institution is not just about funding deals, but also about helping dealers acquire new customers.

What are some of the dealer programs that have proven to be most successful, and what are their key elements?

D’Errico: In today’s market, successful dealers are thinking beyond the box. Now they’re also focused on being customer experts who can provide other services and solutions. Their strategy is to look at how to deliver more value and efficiency; in other words, provide a better overall customer journey. And of course, they can sometimes find the capabilities they need in cooperation with their financing source, like CIT.

Hunter: We have found that programs are most successful when both parties are focused on a long-term relationship and the strategy of the dealer business. Financing is the “third-leg” of the sales stool, and when properly integrated into the sales cycle, delivers the most flexible experience for the end-user customer. A strategic program allows the lessor to help the dealer address its business challenges and sales efforts. While competitive rates are a component of an effective dealer program, the overarching strategic alignment between the lessor and the dealer results in long-term success. This approach has allowed DLL to support its dealers in upgrading their portfolios numerous times over the life of the program.

Parker: The need for information is paramount to driving new business. Business intelligence is the name of the game. A part of our prospecting tool enables dealers to effortlessly generate real-time prospect data and alerts to help formulate strategies to identify and win new customers. Another important program is flexible end-of-term options to help ensure our dealers retain customers.

Capparelli: The LEAF CapitalAlliance, which encompasses growth capital, fleet financing, geographic expansion, acquisition support and more, is getting a lot of interest. As I mentioned, equipment dealers need an integrated source of financing and capital delivered by a team that understands the industry on more than just a surface level. This gives them a cohesive, coherent source of equipment financing and capital to drive growth. Ready to expand your service fleet, product lines, or staff? Need growth capital, funding for a new location, or financial resources to help see you through an acquisition? You can do all that with the LEAF CapitalAlliance. And it’s all backed by more than three decades of industry knowledge and expertise.

Fisher: Our finance program for dealers selling information technology (IT) and As-a-Service offerings helps dealers combine hardware, software and installation and services into a single invoice for their customers. Our finance program, Hardware as a Rental (HaaR) is helping dealers ensure recurring revenue and improve their margins. One solution provider told us, “Since working with GreatAmerica, our sales margins and cash flow have improved tremendously.”

In general, bundling hardware, services and supplies, whether with the IT component, or more of a print or MPS approach, is an area where GreatAmerica shines. Not only do our finance agreements help our dealers win with invoicing flexibility, we have a very robust back office to handle efficient and effective administration. Our Contract Management Team and the infrastructure to support them helps us successfully bill, remit, post and reconcile more than $20 million a month in pass-through dollars for our dealers.

Additionally, the buzz around seat-based billing (SBB) is building momentum in the marketplace today. GreatAmerica is the first finance company to create a customized program for SBB, and has joined forces with Print Audit, Clover and BEI to educate dealers on this opportunity by way of nationwide road shows. SBB allows vendors to bill customers a flat monthly fee for their print services, per user. Our total financing solution ensures this new billing model can be billed on a single invoice to protect our dealers’ monthly revenues. Take advantage of our insight into the industry and stay tuned for more developments related to this financing approach.

As we look ahead toward 2019, what market conditions and other factors could impact funds availability and interest rates?

Fisher: The potential for higher interest rates in 2019 remains very strong. The broader market has shown a heavy focus on the fed funds target rate above all else. Earlier in the year, political announcements (via Twitter or regular channels) had a more meaningful impact on interest-rate markets, however it now seems a “wait-and-see” approach is in effect. Looking forward, interest rates appear to align tightly with fed forecasts. The markets currently anticipate two more rate hikes in 2018 (September and December) and between two and three rate hikes in 2019. If current forecasts remain, that would suggest an increase of 1-1.5% in the fed funds target rate by the end of 2019.

Funds availability in 2019 looks stable. Banks continue to be flush with cash and the current lending capacity remains strong in the short term. The industry is starting to see increases in delinquency. As banks start to realize this, liquidity will retract.

Rob Parker,
Wells Fargo Equipment Finance

Parker: All signs suggest the economy is healthy, but there’s still a lot of uncertainty. It looks like the slow-but-steady upward rate trend will continue into 2019, which shouldn’t negatively affect liquidity to any great extent. Given what we’ve experienced over the past 10 years, dealers should continue to monitor the environment and be ready to make changes quickly when opportunities or threats emerge.

Capparelli: We’re starting to hear talk of the U.S. economy, which has been overperforming relative to the rest of the world, slowing to a rate comparable to that seen in Europe. While this could certainly impact the fed’s plans to increase interest rates, the best course of action right now is to anticipate their continued rise. Tariffs and potentially widespread trade wars could also have far-reaching effects. LEAF, as a subsidiary of People’s United Bank, will continue to further strengthen our asset portfolio with quality credits.

Hunter: The continued convergence of traditional document imaging dealers and additional services and products will have a big impact on the industry. Dealers should be looking for lessors who understand the copier and technology environments due to the aforementioned convergence trend. The migration towards managed services, where bundled assets, maintenance, installation and software are combined in one contract will continue to reshape the purchasing landscape for customers and ultimately the dealers. We are certainly experiencing a rising interest rate environment which affects all dealers and customers alike. So while rates are rising across the board, dealers should continue to evaluate lessors on their channel experience and understanding, investment in products and services and commitment to simple and flexible end-of-lease terms. We are still in a historically low interest rate environment and the continued desire to use equipment rather than own should perpetuate the need for competitive leasing arrangements.

D’Errico: I think you’ll continue to see the office imaging industry going “beyond the box” to fuel growth. We’ll see even more selling of solutions and services. Any further increases in interest rates will only boost the emphasis on adding value and improving the customer journey.

Erik Cagle
About the Author
Erik Cagle is the editorial director of ENX Magazine. He is an author, writer and editor who spent 18 years covering the commercial printing industry.