How to Build a House of Bricks When the Big Bad Wolf is On His Way

In November of 2022, the Equipment Leasing & Finance Monthly Confidence Index fell to 43.7, its lowest point in 2-years. This represents a steep downturn in sentiment from a year ago

2021 was a boom year. In the buying frenzy that fueled the country’s rapid post-pandemic recovery, most asset-based and equipment lenders and lessors thrived. Business was brisk and default rates low. But the sunny blue skies of 2021 became partly cloudy in 2022, and things are beginning to look downright threatening in 2023.

High global inflation caused by a multitude of factors has begun to weigh on economic performance. And while the experts continue to argue whether the U.S. will experience a recession, many lenders and lease finance companies say they are already experiencing one.

In the normal course of business, many of these companies would wait to act; watching their portfolios for signs of trouble and then activating their collections and recovery teams when and if trouble arises. But if the last few years have taught us anything, it’s this… nothing is “normal” anymore.

If you’re a lender or lease finance company, waiting and watching may not be a satisfactory solution to the problems that that are brewing in your portfolio. And in a market and economy that looks like nothing we’ve seen before; the old solutions may not be enough to keep your portfolio’s performance up to your – or your board’s or shareholders’- standards.

Fortunately, many lenders and lease finance companies have found a suite of solutions that work to improve loan portfolio performance and reduce the hassles, risks and costs associated with repossessions, even in unprecedented times like ours.

This Portfolio Optimization Strategy consists of the following 5-key elements:

1. Preemption – Using broad industry analytics, it’s possible to identify early-stage collection problems. Using data inputs that include customers/borrowers, region, industry, asset type, asset integrity figures, default trends and more, it’s possible for lenders to focus on vulnerable areas in their portfolios with customer and brand-friendly strategies to resolve problems before they become problems.
2. Brand-centric collections – Many lenders are learning that their existing collection and recovery teams lack the skill or finesse to deal with distressed borrowers in an increasingly hostile environment. This is especially important today when regulators are watching every move. Forward thinking lenders know that any mishap could have a damaging impact on their reputation and brand. When conditions begin to normalize and robust growth resumes, they’re outsourcing strategically to ensure their brands are unscathed by these difficult times.
3. Creative Problem Solving – Some lenders are using out-of-the-box approaches to old problems that can yield some surprisingly positive outcomes. From asset surveillance conducted by reps in the field to help ensure asset integrity to pro-active “premarketing” to identify prospective buyers for assets in the possession of borrowers at high risk of non-payment. It’s easy to turn to the familiar, especially when times are tough. But creativity can make a big difference on a lender’s balance sheet.
4. Empathetic Recovery – More and more, lenders and lease finance companies are focusing on dealing with at-risk and in-default borrowers in ways that respectful and humane. Recognizing peoples’ dignity reduces the risk of confrontation, helps preserve relationships, keeps regulators happy and reduces the probability of expensive and time-consuming litigation.
5. Strategy, not Firefighting – Each of the portfolio optimization elements described above call for a different way to think about problems that may exist in your portfolio. Today, most companies wait for problems then turn to past practice to put out the fire. But some companies are taking an entirely different stance. By expanding their field of view to earlier in the loan lifecycle, they’re making smarter decisions. They’re also trusting their brands and customer relationships with strategic partners who are dedicated to delivering optimal portfolio results – from preemption to collections to recovery.

By diligently observing two or more of these principles, forward-looking companies are taking steps to minimize financial risk. They’re also reducing their exposure to the regulatory or reputational risk that often accompanies collection and recovery activities. The more of these principles are in place, the better.

Achieving these desirable outcomes can be difficult for many lenders and lease finance companies for the simple reason that they haven’t developed the specialized competencies required to make their loss mitigation strategies succeed. This is partly because consumers think and behave differently today. That why more and more companies are partnering with third-party portfolio strategists to manage their exposure to risk and handle the sometimes-sticky details when balances go unpaid.