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Riding The Third Wave With One-Hour Funding

Date: Aug 22, 2017 @ 07:00 AM
Filed Under: Industry Trends
Related: Credit, Fintech, LeaseQ

How can a company prosper, and possibly dominate, in the small-ticket equipment finance marketplace today?

The short answer is by addressing three critical client needs:

  • Make shopping for financing easy and fast for the borrower,
  • Offer competitive A-D credit financing for the vendor and its customers; and,
  • Deliver easy and fast funding (one-hour funding)

Equipment finance vendors and lenders want to make shopping for financing easier for borrowers by providing instant quotes, soft credit pulls, and comparison financing payments. And vendors, brokers and captives are already delivering on A-D financing. Many also have an automated platform for managing all finance activity in one place. But the third marketplace need — one-hour funding — is currently not being addressed. While auto lenders often promise they can “finance a new car in about 45 minutes,” that kind of easy, fast funding simply isn’t available in the equipment financing industry.

We call that “ideal solution” one-hour funding (1HF). Of course, we’ve helped a borrower or two fund a deal in an hour, and we fund deals in a day from time to time; but that’s not what we are talking about here. Some companies refer to 1HF as a “BHAG” (Big Hairy Audacious Goal). Others call it a killer app or the last mile of equipment financing. Whatever you call it, one-hour funding addresses a long list of business needs and forces a paradigm shift. In the real world, there is no coming back from a true paradigm shift.

Paradigm shifts are thrilling, of course, if you are riding the next wave; but they will pull you under if you miss the wave. I have been fortunate to catch two huge business waves. However, as every good surfer knows, storms far out at sea (like the financial crisis of 2008, and the birth of a new generation of technology) mean mammoth, and potentially dangerous swells. I’m happy to report that if you are in the equipment finance industry in 2017… Surf’s up!

Chart Lease Q Paradigm Shift Graph Vernon Tirey - Equipment Finance Advisor

How did equipment financing sidestep two significant paradigm shifts?

Equipment financing to date has been able to sidestep or avoid past paradigm shifts, but that won’t happen a third time. Let me explain. I was introduced to the equipment finance industry in 2011. It was eye opening, like being transported back to 1999 or finding a living dinosaur in my back yard. I am often asked by investors why equipment financing is not automated and why is it lagging so far behind other financial services sectors. My answer is that like Br'er Rabbit and his briar patch, only people in the equipment finance industry feel at home in this deceptively complex business.

The equipment financing industry supports a true three-party transaction that has been successfully serving subprime borrowers for over 50 years, where none of the 500+ specialty lenders has more than 4 percent market share across a highly-fractured marketplace with over 25 market sectors.

Complex problems require sophisticated solutions and I believe the third paradigm shift we are currently experiencing delivers the sophistication required to address the complexity found in equipment financing. Although the industry dodged the first two big business waves, it is going to get hit like a grass shack in a tsunami when the third wave crashes ashore.

The First Wave – Equipment Financing Opted Out

The first big wave I caught in 1985 was the rise of data-driven businesses. It was the early days of database marketing and closed-loop direct marketing. Like every paradigm shift, in the beginning, capturing, processing, storing and distributing data to target sales efforts was extremely difficult. We could see the potential for new techniques, but the old ways of selling were still more effective. With the advent of relational database technology, analytic software, variable printing, affordable PCs, and more, the golden age of database marketing became a reality in the 1990s.

Catalog companies and credit card companies exploded, small businesses like Geico grew into industry leaders, and the idea of “right person, right offer, right time” became a reality. It didn’t take me long to learn that though the winning companies adopted new technologies and techniques, a lot of losing companies did too. Technology adoption is not a guarantee for success, but it often is the ante if you want to play in the next game.

Equipment financing sat this one out because 25 years ago selling financing through an equipment seller network or through large key accounts was more cost efficient than going direct. For the most part it still is today. Even after adopting best practices, new alternative lenders that serve the SMB fintech space have much higher deal acquisition costs and very low application conversion rates of just 3-7 percent. The secret’s out — fintech companies know about the cost advantages of the vendor channel; they are well capitalized; and, they are jumping on the third wave to lower the cost of acquisition. Unlike many equipment finance companies, fintechs have fully embraced a wave-one mantra: Build long-term relationships with profitable customers.

The Second Wave – Equipment Financing Is Slow to Adopt

Equipment financing companies didn’t skip the second wave, but they have been very slow to adopt it. By 1995, it was no longer about data management but building information-driven businesses. Improving business performance meant dealing with increasing complexity and required significantly more sophisticated solutions. The customer was taking charge, and the mantra became “anytime, anyplace, no matter.” Business ideas published 15 years earlier became practical realities and included such features as just-in-time processing, mass-customization, and the birth of online marketplaces (e.g. Amazon, eBay, Craigslist). The internet was changing the way we looked at business, the front end and back end of the enterprise (ERP+CRM) was being integrated, and the customer experience at the point-of-sale changed forever.

In the early 2000s, several equipment finance platform startups were born, but all failed for failing to meet one of three client needs identified at the beginning of this article. Only one company, Electronic Financial Group (EFG) – a Canadian firm – developed real-time credit decision technology and a market place platform. However, they ran out of cash, as so many startups do. EFG created a true Wave 2 solution that brought information to the point of sale to finance equipment. The other platform companies were either brokers in disguise or mid-ticket and/or large-ticket solutions that failed because they lacked the sophistication required to deal with complex deal structures. More than a decade later, equipment finance companies began delivering POS and ecommerce solutions with integrated equipment purchase and finance processing (managed services), including digital documents, electronic signatures, automated underwriting, and automated servicing. As they say, better late than never.

The Third Wave – Natural Barriers of Entry Give Lenders A Little More Time

Up to this point, the equipment leasing industry (as it was called in those days) had been relatively unaffected by the disruptive technologies in waves one and two. In 2005, the third wave we are experiencing today began to slowly rise. Unlike data-driven or information-driven businesses, wave three gave birth to knowledge-based businesses. By 2011, many fintech firms were data- and information-driven the day they took their first application.

This third wave is significantly more advanced, because it builds on the foundation of previous technologies to deliver: Applications that are always on, sensing and serving;

  • Cost-effective, cloud-based computing making it easy to aggregate, process and scale data anywhere at any time
  • Artificial Intelligence and machine-learning algorithms allowing for self-learning systems that leverage low cost algorithms and real-time decisions; and,
  • Mobile devices and the internet-of-everything connecting it all together.

The good news is that these online lenders and marketplace lenders are struggling with one-hour funding. Firms like Kabbage are delivering one-hour funding in one automated online session but for a narrowly defined loan product to a narrowly defined SMB market segment. We’re still in the early days; but the question is not will fintech companies be able to pull this off. They are already pulling it off. The question is how long will it take, and when will it make sense to turn their attention to equipment financing and the low-cost equipment vendor channel?

What New Technologies & Techniques Should Companies Adopt Today

At the very least, all equipment finance companies today should have fundamental wave-two capabilities. These include:

  • A CRM system like Salesforce,
  • Digital documents with electronic signatures, and
  • A low-cost lease and loan servicing system that operates in the cloud

Ideally, they would also have:

  • Automated underwriting with statistically driven credit scoring
  • Financing platform that delivers all required information to track and manage finance applications and contracts

It’s exciting that there are significant needs that can be addressed with wave-three technology, but we know technology alone is not going to guarantee success.

Serving the customer (borrower and vendor) is the best guarantee of success. Solving that challenging need for easy, fast, competitive funding through technology adoption will set new standards and maybe introduce new industry leaders. Sure, not all customers want or need one-hour funding; but once delivered, a new set of challenges can be pursued.

No company can do this on its own because the complexity now requires connected solutions that support a network effect. There is no telling what new technologies and techniques we may employ at the end of the day, but before long, we will all be riding the third wave.

Vernon Tirey
Co-Founder & CEO | LeaseQ
Vernon Tirey, a 30-year veteran in enterprise automation solutions, is Co-founder and CEO of LeaseQ, a marketplace bringing automation and efficiency to small business borrowers looking to finance equipment to start and grow their businesses.
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