Weakened demand for business loans in 4th quarter: ELFF survey

Investment into real equipment and software for the equipment financing market is expected to grow 2.2% in 2024, despite weakened demand for business loans.  

The Equipment Leasing and Finance Foundation’s second-quarter economic outlook report found that a quarter of medium and large banks surveyed reported weaker commercial and industrial loan activity in Q4 2023. Smaller lenders were also affected, with 22% reporting a downturn in applicants.  

ELFF’s report found that equipment investment was negative for the second consecutive quarter in Q4, though it expects improvement in the latter half of this year. 

“Although equipment and software investment has been weak across most verticals over the last year, activity is expected to pick up as the year goes on,” Leigh Lytle, president of ELFF and president and chief executive of the Equipment Leasing and Finance Association, said in a statement. “The Fed is likely to be cautious about rate cuts, particularly given recent backtracking on inflation, but we still expect borrowing costs to fall later this year.” 

Most lenders — 95% — surveyed blamed a downturn in lending activity on decreased investment in plants and equipment, while decreased inventory and accounts receivable financing were also cited as factors, the ELFF report noted.  

Nearly half of all banks surveyed reported lower demand for construction and land development loans, while 53% reported weaker demand for loans secured for nonfarm, nonresidential properties.  

“Interest rates are hurting the small and mid-sized companies,” said Jim Jenks, founder and CEO of Scottsdale, Ariz.-based Global Financial and Leasing Services, which leases equipment for industries, including telecommunications, manufacturing, green energy and medical.  

“Costs have increased and we’re seeing the delinquencies very much mirroring what we saw in 2007 to 2009” before and during the Great Recession, he told Equipment Finance News.  

Lending standards for commercial and industrial loans have been pinched. Fifteen percent of banks surveyed reported “moderate tightening” of loan standards for large and middle-market firms, while 19% reported tighter standards for smaller operations.  

Jenks said Global Financial and Leasing is “receiving 20% less applications this year on a monthly basis than we did last year,” but added that applicant credit quality is improving.  

“We’re seeing that we’ve got better quality applicants, in general, coming to us even though the quantity is less,” Jenks said.  

A decrease in manufacturing activity has affected the equipment finance industry, according to ELFF. Its report found that both capacity utilization and industry production have trended downward in the past 18 months, with manufacturing hours worked dipping to the lowest level since 2010, excluding the peak of the pandemic.  

Shipments are increasing slightly, up 1% year over year in February. The ELFF report noted that “mediocre readings for both orders and shipments align with subdued industry confidence and soft manufacturing data.” 

Inflation remains high, and that will prevent the Federal Reserve from issuing any rate cuts in the near future, with the outlook predicting that any relief will come this summer at the earliest, Jenks said. 

“I can benefit from rate cuts,” Jenks said, adding that even a quarter- or half-point rate cut would be welcome and would help his margins. 

Jenks said he doesn’t expect rate cuts to drop before June. He also doesn’t expect inflation to slow much, saying, “I think it’s still going to be in the 3% range. … At best, you’re going to see two [rate] cuts, in my opinion, between now and the end of the year.”  

Register for the 2024 Equipment Finance Connect, which focuses on best practices in equipment finance, on May 5-7 in Nashville, Tenn. Learn about the event and free dealer registration at EquipmentFinanceConnect.com.