Businesses, nonprofits and government agencies will spend nearly $1.5 trillion in capital goods or fixed business investment (including software) this year, and they will finance a majority of those assets.
Equipment financing is a critical source of funding for a majority of U.S. businesses, allowing them to acquire the equipment they need to operate and grow. Equipment acquisition plays a critical role in driving the supply chains across all U.S. manufacturing and service sectors.
With a steadily improving economy and favorable credit conditions, business owners are beginning to make important decisions this year about equipment replacement and expansion.
To assist businesses in planning their acquisition strategies, the Equipment Leasing and Financing Association distilled recent research, including its “2015 Equipment Leasing & Finance U.S. Economic Outlook Report,” to create a list of the top 10 equipment acquisition trends for 2015.
1. Investment in equipment and software will reach an all-time high in 2015. As the U.S. economy continues to improve, business investment is forecast to reach a record $1.484 trillion in 2015. As business investment grows, demand for equipment financing will increase.
2. Businesses will invest in equipment not just to replace aging assets, but also to aid expansion. The pent-up replacement demand that has driven equipment investment in previous years may be supplemented by long-awaited expansion investment as capacity utilization rates in some industries reach or surpass levels historically known to spur business investment. Industries poised for investment growth include oil and gas extraction and transportation equipment manufacturing.
3. While some equipment types will see strong growth, others will moderate. In 2014, equipment and software investment increased 9.6 percent in Q2 and 9.3 percent in Q3. Looking ahead, growth in equipment and software investment is expected to moderate somewhat, as it is unlikely to keep up the strong pace seen in Q2 and Q3. A still healthy growth rate of 6 percent is forecast for 2015. Aircraft, trucks and other industrial equipment are projected to be among the higher growth types, while agriculture, computers and software are expected to see slower growth.
4. Improving market conditions will continue to increase credit supply and demand for equipment acquisitions. As the economy steadily improves and business confidence continues to increase, credit standards should modestly loosen. The propensity to finance decreased in the wake of the financial crisis as businesses de-leveraged and refrained from new business investment. Since bottoming out in 2010, the rate at which businesses finance their capital spending has grown consistently and will continue to increase in 2015 with steady economic recovery and shifts in Federal Reserve policy.
5. Eyes will be on short-term interest rate increases. Expectations for the Federal Reserve to raise short-term interest rates in 2015 should spur equipment investment as businesses seek to lock in equipment financing at lower rates. Despite rate increases, businesses will find that a highly competitive “buyer’s market” will continue to make financing an attractive option for acquiring equipment.
6. Businesses will use financing for a majority of their plant, equipment and software expenditures. In 2015, 62 percent or $922 billion of investment in plant, equipment and software in the United States is expected to be financed through loans, leases and lines of credit. A majority of businesses—seven out of 10—will use at least one form of financing to acquire equipment.
7. Advances in the use of technology will drive innovative financing options. Equipment finance providers are streamlining their business processes and improving customer self-service capabilities using digital technologies. At the same time, some end users are moving away from traditional equipment consumption models and toward hosted or managed services based on usage rather than total ownership. To meet customer demand and address evolving technology equipment requirements, equipment finance companies will tailor innovative financial offerings.
8. Several “wild cards” could impact equipment acquisition decisions. In what could be a breakout year for the U.S. economy, positive and negative external risks could affect equipment investment. Potential political gridlock, global economic weakness and geopolitical risks could be a drag on investment decisions, but GDP growth from low oil prices, a potential surge in the housing sector and sufficient capacity utilization could have firms ramping up capital expenditures.
9. Nontraditional financing will continue to grow and play a larger role in the equipment finance industry. As regulatory scrutiny increases and some banks’ lending standards tighten for certain credits, nontraditional financing sources, such as investment bankers, venture capitalists, insurance companies, crowd funders and others, are exploring opportunities in the equipment finance sector.
10. A final lease accounting standard will be released. The Financial Accounting Standards Board and the International Accounting Standards Board continue to work on the lease accounting project, which will change how leases are accounted for on corporate balance sheets. A final standard is anticipated in 2015, with a possible effective date of 2018 or later. The good news is that the benefits of leasing equipment will remain intact despite the lease accounting proposal.
For a video and infographic highlighting the top 10 equipment acquisition trends for 2015, visit http://equipmentfinanceadvantage.org/rsrcs/articles/10trends.cfm.