The importance of financing mobile assets

In the 2019 calendar year (according to BDL[1]) a volume of around EUR 266 billion was invested in companies in mobile assets.

A rule of thumb is that around half of this is leveraged. Of these EUR 133 billion, around EUR 64 billion is accounted for by leasing (almost 2/3 captives), around EUR 17 billion in loans from so-called credit banks (3/4 at the POS) and another EUR 9 billion installment purchase (again by leasing companies), so that only a remainder of roughly EUR 40 billion remains, which is addressed by all universal banks nationwide – and a good part of the investments of this simply disappears in the current account, i.e. the working capital facility.

The classic investment loan, usually designed as an installment loan, is the standard form of medium-term financing in the corporate customer business of a bank or savings bank. In the course of the conversion from Basel I to Basel II and other associated process optimizations, the banks have lost their attractiveness and efficiency in this form of financing. The banks and savings banks have celebrated very good successes in the private and commercial real estate business in recent years and, due to the general price development for real estate, were able to achieve a disproportionate increase in value performance in addition to a significant increase in unit output. In comparison, the investments in a company’s equipment and mobile systems regularly look relatively manageable. The shorter terms of this financing mean that more business has to be done to replace a portfolio – growth is therefore significantly more resource-intensive than with real estate financing with significantly longer terms and correspondingly lower repayment rates. The non-recognition of variable collateral on the equity charge regularly leads to the fact that these transactions are at least formally treated as unsecured loans due to the associated higher administrative costs. (Higher is meant here relatively compared to a mortgage loan).

The result of the control, which is derived from the internal parameters of a bank or savings bank, is that only the short-term business, i.e. the working capital line and the long-term real estate business, are promoted as attractive business. The medium-term lending business thus falls into a hole between the prioritization of sales resources and the risk strategy practiced by the respective back office. At the same time, however, this hole is also regularly shown in the liquidity gap profile, and especially in times when interest rates are expected to rise again, a higher capital turnover in the balance sheet is necessary, requiring in particular a shortened duration on the assets side.

Much more important, however, is the importance of the investment for the customer. A commercial property is at one point a major decision-making project (that also attracts a great deal of attention in the private sphere as well), as this represents an essential, almost life decision. Nevertheless, despite all the passion, a commercial property says nothing about the lifeblood – transferred to the private, to the hobby.

Who doesn’t know the type of entrepreneur,

• that knows every single screw in his shop,
• that walks through the company first thing in the morning and last every evening,
• that derives his self-image from his production processes,
• that actually works on product development and not just assigns it, thus this individual has developed or invented components of his value chain himself…?

The simple question is: Is a real estate financing more important (closer to the heart) for this type of customer / entrepreneur or the decision to renew or expand their production?

In the highly competitive market of financing mobile assets banks and savings banks have lost significant market shares in recent years. There are various reasons for this decline. It is partly due to the fact that more and more customers are already receiving financing offers from their dealers and the way to the bank or picking up the phone always means an additional step for the customer, but also because the banks and savings banks do this business too have only offered reluctantly.

From the point of view of a bank or savings bank, pricing in this market is very tight, which is due in particular to the increasing importance of manufacturer-related market participants. These market participants have special expertise in the properties they finance. At the same time, thanks to their proximity to the manufacturer, they have access to the secondary market for these objects, so that they are able to calculate with particularly low breakup and disposal costs.

The level of margins in the market in connection with the necessary use of resources (especially the personnel intensity) meant that some banks and savings banks no longer actively offered this financing, i.e. only on request and/or only with their top customers.

The capital situation in the banks and savings banks over the past 10 years made the mortgage-backed business even more attractive. This, in turn, has not helped to relativize or weaken any structural reservations of the risk function with regard to machine investments or, in principle, movables.

In the banks and savings banks, the annual appraisal (under whatever name) has established itself as a format in which the respective corporate customer advisor discusses the financial side of the company in full with the entrepreneur. An integral part of this conversation is always the question of the plans and the planned investments for the following year or years.

However, this format has the weakness that it only asks about planned or imminent investments and the annual rhythm learned by both sides at the same time suggests a certain altitude for the scale and relevance of the topics. This means that there is a filter in mind on both sides and therefore not everything is addressed in case of doubt.

If it is a replacement investment, an investment can arise at very short notice and therefore also spontaneously very urgently – even if the annual appraisal took place only two weeks beforehand. A new major customer or an extraordinary order can also mean that there is a spontaneous need for investment. The entrepreneur may also be carrying a possible investment decision with him, but does not address it in the annual interview because he is not yet clear about all the necessary decision parameters.

At the leasing companies in Germany, the vast majority of new business comes from so-called captives, i.e. manufacturer-linked leasing companies. Here we can assume that new business is initiated at the point of sale, just as the credit banks themselves are already initiating over 75% of their new business at the POS. From the point of view of the distribution channel, the banks and savings banks are at a structural disadvantage here, which can only be compensated for through increased efforts in market cultivation with continuous and more frequent customer contacts. If there is a lack of proximity to the specific investment decision, then this can only be compensated for by constantly asking questions.

The financing of equipment investments thus offers one of the most qualified contact opportunities in corporate banking!

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[1] BDL = Bundesverband Deutscher Leasing-Unternehmen = Federal Association of Leasing companies