Smart Contracts Take Hold In Equipment Finance

The equipment finance and leasing market is typically seen as a source of funding for businesses in need of big, heavy machinery. But this type of financing is on the rise thanks to solid economic growth and optimism in the business community. With that growth, business borrowers are turning to equipment finance to accelerate their digitization journeys and invest in new technologies.

The Equipment Leasing and Finance Association’s Monthly Leasing and Finance Index has reflected positive growth in this industry for years now. Its latest index saw a 4 percent year-over-year increase in new business volume for July, with financiers bolstered by the overall strength of the economy, the equities market, employment and corporate tax reform, according to analysts. Earlier analysis from the ELFA found a nearly 7 percent growth in new business volume last year for the space.

It’s difficult to make generalizations about the equipment finance industry, noted ELFA President and CEO Ralph Petta, because industry players are so diverse. What can be said, however, is that strong economic fundamentals have encouraged U.S. businesses to invest in growth and the equipment they need to achieve it.

“When they’re investing in their companies, they’re going to acquire assets,” he told PYMNTS.

Those assets go beyond heavy machinery. Indeed, equipment finance helps businesses efficiently update their infrastructures and technologies, Petta said, noting that average term loans for equipment loans – 36 months – align perfectly with the average lifespan of many tools, like laptops.

“The life of an aircraft carrier or a rail car is 30 to 40 years. That’s not the case with telecommunications or IT equipment,” he said. “A piece of IT equipment or laptop or server is constantly turning over, and this financing is perfect for those kinds of assets.”

A strong economy and positive outlook among business leaders has corporate borrowers ready for a technological upgrade. While the equipment finance market can finance those upgrades, the industry itself is also enjoying some technological innovation, Petta noted, though it is at a different stage than other financing markets.

The industry isn’t seen as much of a disruption among alternative finance players as other categories of lending, for instance. And when it comes to adoption of artificial intelligence, machine learning and other technologies – quickly gaining traction in underwriting and sourcing for some areas of lending – these tools haven’t quite taken off in the ELFA space, either.

“There isn’t really an impact, directly, by FinTechs,” said Petta. “There are a couple of FinTechs that have come into our space. But the biggest impact has to do with how FinTechs are prodding the [equipment] leasing and finance companies to make sure they check the boxes in terms of efficiency, and that they have the latest technology.”

Like the traditional banking space, alternative finance’s disruption in equipment finance comes in the form of market pressure to innovate and digitize. Direct disruption, however, has been muted.

“Whether things like blockchain and artificial intelligence and robotics are impacting the industry, we’re only now trying to understand that on behalf of our members,” Petta continued.

He added that the diversity of providers in the equipment financing space has created an “uneven application” of these technologies, but industry players are certainly examining the tools.

There are a few technologies that the equipment finance market seems to have gravitated toward, according to Petta. One of them is data analytics, as the industry approaches more sophisticated credit underwriting and faster credit decisions. Another, he said, is smart contracts. These blockchain-powered digital contracts negate the need for a middleman and can trigger actions based on fulfillment and adherence to contract terms.

“A lot of leasing and finance companies are already using smart contracts to consummate the transaction,” he said. “Smart contracts have triggers that are automatically identifying customers, identifying deadlines and schedules, so it takes a lot of the individual, manual transaction out of the deal.”

As the industry explores disruption from other technologies, Petta said ELFA will be particularly focused on how these tools impact member companies’ origination and underwriting processes, portfolio management, asset remarketing and beyond. But at this point, he said, “it’s hard to know exactly where and how productive these new technologies are being in this industry.”

Like other areas of finance, the equipment leasing and finance arena will have to get on-board with innovations as borrowers demand greater efficiency, transparency and digital services. That demand is also fueling those borrowers’ own adoption of technologies, and continued economic strength is expected to yield greater demand for equipment finance to power that digitization trend.

Tax reform, a recent easing of trade tariff anxieties and other factors have all combined to create a favorable market for equipment financiers. According to Petta, it’s a cyclical trend, with businesses turning to equipment financing to invest in assets that will enable them to be more efficient and productive, thus promoting further economic growth.

“It’s more of an environment where companies are feeling good about their ability to grow and expand,” he said. “Where there is business optimism and confidence, we find that businesses will invest in assets and feel good about investing – and then they purchase, finance and lease equipment.”