Equipment Financing Hits a Skid

Companies are cutting back on new equipment orders as the effects of tight credit spread.
Alan RappeportSeptember 25, 2008

Companies are pulling back on financing equipment for their businesses as tight credit and diminished demand is showing new signs of spreading throughout the economy.

The August survey by the Equipment Leasing and Finance Association shows that new business volume dropped by 14.5 percent, falling from $6.2 to $5.3 billion compared to the same month the year before. The August drop was even bigger compared to July — down by 22 percent, from $6.8 billion.

“There may be a slight pull-back with concern about where the economy is heading,” says Kenneth Bensten, president of ELFA. “More and more financial services companies are feeling the constraints of access to capital.”

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The latest numbers clash with what had been a steady year for equipment financing, with business volumes to date 2.2 percent higher than 2007. Bentsen said the 25 companies surveyed reported less demand, higher risk premiums, and capital constraints.

“For nearly a year now, everyone has been watching for signs that the global credit crisis is spreading into the general economy,” said William Verhelle, chairman of ELFA and CEO of First American Equipment Finance. “Specific equipment finance segments such as transportation, construction, and some areas of the small-ticket market have experienced problems during the past several months. Until August, however, the broader equipment finance industry had yet to see a slowdown.”

As is generally the case, the ELFA survey results kept pace with August data on durable goods from the U.S. Census Bureau and on new orders from the Institute of Supply Management, according to Bill Choi, director of market and industry research at ELFA. New orders for manufactured durable goods — meant to last at least three years — dropped by 4.5 percent in August to $208.5 billion, the biggest decline since January. In August 2007 there was $218.5 billion in new orders.

The Institute for Supply Management revealed a slight dip in August for economic activity in the manufacturing sector; its index slipped from 50.0 percent in July to 49.9 percent. The year-on-year decline was more significant, as the ISM index had reached 52.9 percent in August 2007. A reading above 50 percent indicates the manufacturing economy is expanding, while one below 50 percent shows it is contracting, according to ISM.

Export orders picked up in August, according to Norbert Ore, chair of the Institute for Supply Management manufacturing business survey committee, but domestic demand has been slow for most industries.