The equipment financing industry plays an integral role in our economy. Around 8 in 10 American businesses use equipment financing and leasing to “acquire the productive assets they need to operate and grow,” according to the Equipment Leasing and Finance Association (ELFA).
To help businesses and equipment vendors make informed decisions regarding capital production and sales strategies in 2023, we’ve outlined the key trends emerging within the equipment financing industry.
Supply chain difficulties
Supply chain issues are expected to continue into the foreseeable future. Initially, the COVID-19 pandemic caused many companies to cut back on production and reduce the money spent on equipment. Since cases have eased and customers have returned to pre-pandemic habits, however, optimism among businesses has inspired innovative growth strategies. As firms struggle to produce enough output to satisfy demand, they are adapting current business models or developing “pivot” models that require new equipment and systems. Additionally, businesses are expected to invest heavily in maintaining inventory and improving supply chain resilience to prepare for another demand shock in the future.
Automation and digitization
As businesses strive to overcome challenges and transition to new models, the ongoing surge of technology, connectivity, and automation will be central to growth and profitability. Artificial Intelligence (AI), robotics, and smart systems are being integrated at multiple operational levels across nearly every market sector. Farmers, for instance, are using robots and smart technologies to water and fertilize their crops, improve quality control, mobilize and manage machinery, simplify production tasks, and streamline distribution processes. Companies in all industries will also have to implement data-based security protocols to deal with rampant cybersecurity threats and risks.
Rising inflation and monetary policy
In response to rising inflation, the Central Bank has imposed several interest rate hikes this year. This will likely continue until the target inflation rate of 2% is reached. Some end-user markets, like residential construction and automobiles “will suffer comparatively larger reductions in demand due to higher interest rates,” according to the Equipment Leasing and Finance Foundation’s Q3 Outlook Report.
To stay nimble and competitive, businesses must look to flexible funding sources and creative equipment solutions as part of their innovation strategies.
Impacts of Russia-Ukraine War
The war between Russia and Ukraine has created numerous complications for the global economy. There are two trends in particular that impact the equipment manufacturing industry. First, the price of gas has risen dramatically because countries have halted acceptance of Russian oil imports. Although this has made it more expensive to operate gas-powered equipment this past year, several experts forecast that the price of oil will go down as major producers ramp up production to satisfy demand. Second, the price of certain agricultural commodities that Ukraine produces (wheat, barley, sunflower oil, etc.) has skyrocketed. This may require domestic farmers to ramp up production to satisfy the global demand for these goods if the conflict continues.
Economic growth
Despite rising interest rates and significant market volatility this year, GDP is expected to remain positive. According to S&P Global, US GDP is expected to reach 2.4% by the end of 2022. Other statistics (such as increased credit demand) indicate that the economy is expected to grow throughout the year. For example, 11% of banks reported stronger commercial and industrial (C&I) loans among mid to large companies last quarter, and the Equipment Lease & Finance Foundation projects 5.9% growth in business equipment and software investment in 2022. Why? Because leasing equipment makes it easier to weather volatile markets.
Equipment financing and market volatility
Leased equipment typically holds value better during inflationary markets for a couple reasons. By financing equipment and paying for it over time – at a fixed rate – the cost of the asset remains constant while it generates revenue. As goods and service prices increase during an inflation, the spread between the asset cost and its generated revenue (or profits) increases as well. Additionally, using fixed payments to spread the cost out over time, instead of buying it outright with cash or bank lines of credit, allows a business to preserve working capital for other expenses or investments.
Looking forward
A global pandemic, domestic policy shifts, harsh national recession, and geopolitical conflict all underscore warranted uncertainty. Meanwhile, this period of economic growth and business rebound is ripe for investment in innovation. To acquire the necessary assets for success today and strategic growth in the future, organizations can look to equipment financing for more certainty and flexibility.