Banks More Competitive For Commercial Loans
A quarterly survey of senior loan officers by the Federal Reserve found that in the April survey, a “modest” number of banks reported having eased their lending standards and having experienced stronger demand over the past three months. Standards on commercial loans to large, middle-market firms, and small firms, were about unchanged. However, a “moderate” number of banks eased many terms on commercial loans to firms of all sizes, with most indicating that they had done so in response to more aggressive competition from other banks or nonbank lenders. Fewer than half of the banks that reported having eased standards attributed the change to an improved or less uncertain economic outlook.
Banks also reported an increase in demand from firms of all sizes, for the second straight survey. Banks also reported that the number of inquiries from potential business borrowers regarding new or increased credit lines increased. Banks reporting stronger demand cited shifts in borrowing from other bank and nonbank sources, as well as increases in customers’ funding needs related to inventories, investment in plant or equipment, accounts receivable, and mergers and acquisitions as important factors underlying the increase. Banks reported that their credit standards on commercial loans to both large and middle-market firms and to small firms were little changed over the first quarter of 2012.
It is no secret: banks are competing for high grade loans, and rates are low. While this continues to be good news for high grade borrowers, less-than-perfect borrowers are seeing only little relief. Now if I could only figure out how many banks constitute a modest versus a moderate number as far as the Federal Reserve is concerned…and credit crisis solved.
Schools Can Stretch Their Budgets by Leasing IT Equipment
It’s not a secret that school systems across the country have been struggling with their budgets over the last four years. Unfortunately, many schools have been forced to continue to use aging and outdated equipment for financial reasons . However, by carefully weighing the pros and cons of leasing IT equipment including desktops, tablet computers, iPads, servers, laptops, wireless networking solutions and more, many schools may find they can stretch their budgets further and get the equipment they need now by leasing.
Here are issues to consider in the lease-versus-buy analysis:
- There is an implicit cost of money component to leasing which should be factored in to the analysis. Obviously leasing isn’t free. However, today leasing certainly is cheap. With interest rates at historic lows, a school districts cost of funds is also very low, making the decision to lease often even more attractive.
- Leasing is a good way to stay current and refresh technology. With a lease with a $1 purchase option, the IT equipment tends not to be refreshed. But with a lease with a fair market value purchase option, the refresh decision has to be made.
- Consider fair market value leases (which tend to be cheaper) for equipment with a limited useful life (like notebooks), but $1 purchase option leases for IT infrastructure.
- Ideally, negotiate an end-of-lease option that allows a purchase option for some items but not others – defer the decision so you can truly evaluate the equipment throughout the lease term.
- We find that many students want to buy their notebooks at the end of the lease rather than return them, even if the notebooks are 3-4 years old. Some students don’t. Negotiate a fixed price end-of-lease option for this if you can.
- Be careful of extended warranties. Some don’t cover liquid spills, cracked screens and drops.
- In almost all cases we recommend that schools customize lease terms. Most leasing companies—including TEQlease Capital–can and will provide a leasing solution customized for what your school needs.
What questions do you have about leasing? Please contact us and we will walk you through the options.
Manufacturing Up, Beating Expectations Again
The U.S. manufacturing sector’s expansion continued in March and employment perked up, according to data released today by the Institute for Supply Management, indicating mildly expanding activity. The ISM sub-indexes last month improved also. The new orders index increased, as did the production index, the factory employment index and the inventory index. However, construction spending decreased by 1.1% –the biggest drop since July.
We watch the ISM index to gauge the economy’s performance. However, a much more useful indicator for us is what our customers tell us. Typically, in a positive economy, our manufacturing customers acquire equipment in anticipation of demand, or to take advantage of new technologies and efficiencies new equipment can deliver, or to replace old equipment on a regularly scheduled basis. In today’s economy however, customers have to be more reactive, acquiring equipment only when ROI is absolutely compelling or to replace equipment well beyond its useful life. Activity in a sector will also factor into credit approval decisions. Because the manufacturing sector is on the upswing, lenders and lessors view manufacturing customers more positively. This is in contrast to the construction sector, causing construction sector companies to find credit harder to get.
ISM also reported that spending on construction projects in the U.S. fell for the second consecutive month. Private nonresidential construction–including office, commercial and infrastructure building–drove the decline, falling 1.6%. The building industry suffered greatly during the financial crisis, shedding more than 2 million jobs between 2006 and 2011. But more recently, the sector has somewhat regained its footing, adding nearly 100,000 jobs in the past year as construction projects have restarted in many areas of the country. A glut of cheap, foreclosed homes still on the market is keeping interest in new homes in check. But a report last month showed demand may be picking up as building permits reached their highest levels in nearly 3 1/2 years.
What Every Business Should Know About Earnest Money Payments in Lease Transactions
This week I wrote a post for Up and Running Blog on “7 Things Businesses Need to Know About Earnest Money Payments in Lease Transactions” In the post, I wrote about pitfalls businesses should be aware of regarding earnest money payments.
Here are four highlights from that post.
- An earnest money payment is sometimes required by an equipment financing company (lessor) from a lessee equal to a fixed amount or one month’s rent as a refundable application fee. The earnest money payment can be called an application fee, deposit, due diligence fee, etc.
- On receipt of a signed lease proposal and the earnest money payment, the financing company (lessor) works with the lessee to gather all the required and requested financial and equipment information, writes an internal credit request memorandum, and submits the lease transaction to the credit department for approval. This information is submitted along with the signed lease proposal, the payment, and any application fee.
- If the lessor approves the lease transaction, the earnest money payment is applied to the first or last rental payment due under the lease. If the lessor declines the lease transaction, the earnest money payment is refunded.
- If specifically agreed in the lease proposal, regardless of whether a lease is approved or declined, a small portion of the earnest payment will be retained as an application or processing fee. Remember not all lessors require an earnest money payment. Be sure to understand any lease proposal you sign.
If you have any questions regarding leasing or earnest money payments, please contact us.
All Eyes on Detroit and U.S. Auto Industry
With candidates campaigning in Michigan all eyes are on Detroit and the U.S. auto industry. What is important for us in the asset-based business lease finance business is how Detroit’s fortunes impact credit markets and bank liquidity. While it is still a tough task for many businesses to access capital, consumers are finding access to auto loans much easier. Consumer auto financing is in effect leading the charge on increasing credit and liquidity.
Experian Automotive announced that the automotive loan market showed continued improvement, with interest rates for new and used vehicle loans reaching the lowest levels since 2008. In Q4 2011, average credit scores for new and used vehicle loans also dropped, the percentage of loans to customers with nonprime, subprime or deep subprime credit scores increased, and lenders increased their willingness to make loans between six and seven years long.
Here are some highlights for Q4 2011 in auto finance.
Consumers continued to do a better job of repaying loans in Q4 2011, as loan delinquencies fell. The 30-day delinquency rate fell 6.57 percent from Q4 2010 to Q4 2011 (2.98 percent to 2.79 percent). The 60-day delinquency rate fell 9.51 percent.
Another positive sign for the lending market is that the overall dollar volume of loans at risk dropped to $18.5 billion, a $1.862 billion drop from Q4 2010. Average interest rates for new vehicle loans fell to 4.52 percent. Average rates for used vehicle loans fell to 8.68 percent. Average credit scores for new vehicle loans dropped six points to 767. Average credit scores for used vehicle loans dropped nine points to 679. New vehicle loans to nonprime, subprime and deep subprime customers increased by 13.8 percent.
Overall, more encouraging signs that our economy is indeed on the mend.
U.S. Businesses Stepping Up Spending
According to the Wall Street Journal, American businesses stepped up their spending going into the New Year, propelled by an economic upswing that has yet to lift much of the housing market.
New orders for U.S. durable goods—those lasting longer than three years, such as automobiles and kitchen appliances—rose 3% in December from November, the Commerce Department said. The data suggest that business spending on equipment climbed for the first time in three months, indicating renewed confidence among companies.
While the housing market has much ground to regain, corporations are poised to boost production in coming months, powering the U.S. recovery as other parts of the world slow down. Several factors are at play. Demand for automobiles has taken off as Americans who put off purchases during the recession and early in the recovery are now replacing cars and buying new ones. In addition, manufacturers—who saw business slow over the summer—say demand is picking up.
The durable-goods numbers, along with indicators of a brighter outlook among employers, signal pockets of strength in the American economy even as Asia loses momentum and the euro zone teeters toward recession. There were gains in every major category, from primary metals to machinery, with the exceptions being electrical equipment and defense products. Orders for nondefense capital goods excluding aircraft—a proxy for business spending—rose 2.9%, after two months of declines.
Overall, good news for the recovery.
The Beginning of Real Economic Improvement
Is this the beginning of real improvement in the economy?
Several signs point to modest improvements, and on many fronts. U.S. consumer credit increased significantly just before the holidays, offering a ray of hope for the economy. Bloomberg reported that consumer borrowing in the U.S. surged in November by the most in ten years, showing households are optimistic enough to take on debt and banks are willing to lend. According to Federal Reserve figures, consumer credit increased by $20.4 billion, the biggest jump since November 2001, to $2.48 trillion. The advance was almost twice as big as the highest forecast of 31 surveyed economists.
Increasing borrowing usually signals that a drop in unemployment is giving households the courage to take advantage of holiday discounts, buy cars and finance higher education. At the same time, dependence on credit means the job market has yet to improve enough to provide the incomes needed to sustain consumer purchases, which account for about 70% of the economy. The thawing in employment comes as other reports indicate firings have eased, highlighting an improvement in the labor market that is contributing to a rebound in consumer confidence and spending. Meanwhile, the stock market hit a five month high yesterday, and apparently, Europe’s problems are momentarily forgotten.
While this is good news, most of us are looking for sustained positive news before investing and hiring. We are noticing that some of our clients are expanding which is very good news indeed. Stay tuned!
