Equipment Lending Primer for Banks: Sizing Up the US Equipment Finance Market
Below are the answers to a few of the most common questions senior financial managers have about the commercial equipment finance market in the U.S.
How big is the U.S. equipment finance market?
Total Investment in Equipment vs Total Equipment Financed or Leased
Chart 1
Total U.S. business investment over 2009 to 2011 is expect to be about $1 trillion. Each year, about $500B to $550B, or 53% of all business fixed investment, will be financed or leased. (see Chart 1) As businesses re-invest in commercial equipment, the sector is expected to grow at, or slightly above, the growth rate of the U.S. GDP through 2012. (The October 2009 consensus estimate of the WSJ’s panel of 52 economist expects 2010 GDP growth at 2.8%. )
What are the characteristics of businesses that utilize loans or leases to fund equipment acquisitions?
- About 75% of small firms (50 to 100 employees) and medium-sized firms (101 to 1000 employees) use loans or leases to acquire equipment.
- Very small firms (<51 employees) use cash to acquire equipment more than 50% of time, but rely on established lines of credit almost 30% of the time.
- Very large businesses (>1000 employees) use cash for about 50% of their transactions, while about 33% of large firm transactions are facilitated using some form of a lease.
- Generally, businesses with annual revenues exceeding $1 million are likely to finance or lease equipment about 75% of the time.
(Source: ELFA / Global Insight)
Which industries are most likely to use equipment finance to acquire equipment?
Top 10 industries most likely to finance or lease equipment
- Railroads
- Truck transportation
- Air transportation
- Printing and publishing
- Marine Transportation
- Construction
- Mining
- Buses and Transit Systems
- Manufacturing
- Healthcare
What types of equipment most frequently use loan or lease products?
As a percent of total fixed investment here are the top 10 industries that are likely to finance.
- Agriculture
- Aircraft
- Marine
- Railroads
- Construction
- Trucks and trailers
- Automobiles
- Engines and turbines
- Medical instruments
- Computers
Why do businesses choose to finance or lease equipment?
The ELFA conducted a survey of businesses in 2007, asking them select the reasons that drive them to finance or lease equipment. (Respondents could provide more than one answer.) Here are their responses and approximate response rates.
- Optimize cash flow (>50%)
- Tax advantages (>40%)
- Protection from equipment obsolescence (>25%)
- Off balance sheet financing (>10%)