COVID-19 downturn hits lending industry

At this time of year I would normally write a column about lending against a used machine tool, getting organized for a busy fall, or the steps required to successfully arrange for equipment lease financing.

Over the years I also have spent time writing about preparing for a tradeshow visit, but, as I sit here now and critically think about it, I have great difficulty envisioning attending any type of show in the near future.

The world has changed during the last few months, and this year has been anything but normal. Clearly, we are in unprecedented times, and it has been an incredibly difficult year from myriad perspectives.

The leasing industry has changed in a very short amount of time and COVID-19 has affected both credit adjudication and borrowing. There is no doubt this industry, like pretty much every other, has seen some significant changes recently. And although it is still a very fluid and dynamic situation, the following areas are easy to identify.

1. Effect on Existing Lease Approvals

The first thing that happened in mid-March, when a good portion of the country went on lockdown, was that lenders started to re-evaluate approvals that already had been processed.

When an application is approved, it normally is good for 90 days. But when the lockdown started, there were many lease approvals out in the marketplace that had been adjudicated without taking into consideration whether the business would still be operating, what capacity it would be operating at, and, most important, whether it was considered “essential” from a federal/provincial government perspective.

Credit departments immediately started reviewing their decisions and, in some cases, began declining applications that previously had been approved.

In all the years I have worked within the manufacturing industry, whether it was as a machine tool seller or an equipment leasing representative, there have been just a few times when I have seen this type of behaviour from lenders.

Adjustments were made in 2001 after the 9/11 tragedy and then again in 2008 because of issues within the global financial markets. In both those cases, it took months before the changes had any effect in the marketplace.

This time it seems the market adjustments came in the matter of a few days or, at the most, weeks. What also happened was that lenders started to become very discriminating with respect to the assets that they would finance. This means that even if there was no concern with borrowers’ credit profiles, some approvals were no longer being honoured because the lender had second thoughts about the asset and its perceived value.

The first thing I did was alert my clients to hold any deposits or commitments to a seller until I was able to reconfirm their credit approval.

2. Need for Additional Information

Lenders that started re-evaluating existing approvals also typically started requesting additional information.

These requests usually asked borrowers to run interim financial statements for the current year. The lenders were trying to figure out what effect the slowdown was going to have on the borrowers’ business. While interim statements can’t show this directly, they can provide a sense of comfort that the business was healthy and sufficiently capitalized to handle a disruption.

Other lenders also placed phone calls directly to the prospective client so they could hear firsthand if the business was considered “essential” and how the borrowers felt COVID-19 would affect them going forward. In many cases, they also asked borrowers to lay out, in specific terms, the reasoning for adding new equipment at this time and how it will add to bottom-line profitability.

3. Request Additional Documentation

Another immediate change was that many funders started requesting additional documentation to be signed beyond the standard lease agreement paperwork.

This demand was a reaction to the first thing that happened when businesses were forced to shut down, and that was requests from existing customers to defer lease payments. These requests came in at such high volumes that many funders set up separate email addresses and phone numbers to handle the volume of these customer service calls, which had doubled from a normal month.

Funders then realized that additional paperwork should be signed so there was a clear acknowledgement that if new funding was booked in April, that there would be no request for a deferral of the payment on May 1, or anytime thereafter.

I had customers with machines on order that had not been funded yet because they had not been delivered, and I had to have this new acknowledgement signed. Even as business has continued, when I submit and receive lending approvals, this new document is now standard with all of the other paperwork.

We are now a few months into the economic changes caused by COVID-19 and many manufacturers are weathering the storm. Many of my customers still have requirements for new machine tools or accessories such as CAD/CAM software because they are still busy making parts. Also, some are companies that are retooling because they have landed new business to satisfy the demands for essential products like N95 masks or personal protective equipment for front-line workers.

There is no doubt that we are in uncharted territory, but it is very important to take a moment to note the changes within the marketplace and understand how to handle them.