Despite the credit risks inherent to commercial equipment rental and leasing companies — such as intense competition, cyclicality, and high regulation — building an industry niche with well-managed firms in this industry may be profitable for your bank. Well-run firms achieve high equipment utilization and are good at keeping repair costs to a minimum.

There are 8,300 companies that rent or lease commercial or industrial equipment and machinery directly to businesses in the United States. These firms employ nearly 159,000 workers and generate $71 billion annually. The industry serves customers that opt to rent or lease equipment instead of purchasing. Firms may specialize in a particular type of equipment, such as aircraft, or offer a variety of equipment; they may also sell new or used equipment, supplies, and parts.

The makeup of the industry

Commercial equipment rental firms serve businesses and institutions across a wide range of industries. Major categories for rental or leasing revenue include:

• Miscellaneous types of commercial or industrial equipment: This broad category accounts for 44 percent of the industry’s revenue and includes equipment for manufacturing, medical, audio/visual, theatrical and motion picture, modular/mobile buildings, energy/power generating, and more.
• Construction, mining, and forestry equipment: Includes bulldozers, earthmoving equipment, cranes, logging equipment, mining machinery, well-drilling machinery, and welding equipment. These types of rentals and leases make up 23 percent of businesses’ revenue within this sector.
• Transportation equipment: Accounting for 20 percent of revenue in the industry, transportation equipment includes aircraft, barges, boats, ships, tankers, and railroad cars.
• Office equipment: Office machinery, which comprises 4 percent of the revenue, includes cash registers, computers, peripherals, copiers, office furniture, and mailing equipment.

Revenue sources

Customers generally rent equipment for short-term needs and lease equipment for longer-term needs. Often customers rent expensive equipment or equipment that is used infrequently to minimize capital purchases. Rental and leasing programs give customers access to equipment on short notice and eliminate the risk of equipment obsolescence.

While firms in this industry typically purchase new equipment from manufacturers and resellers, in order to recoup some of their investment, they also sell their used equipment at the appropriate time to maximize salvage value. Used equipment sales channels include auctions, brokers, company websites, and manufacturers.

Trends within the commercial equipment rental and leasing industry

Overall performance is spotty

Census figures show total industry revenue increased about 9-10 percent annually in 2011 through 2014, but increased just 5 percent in 2015, was flat in 2016, and then jumped 10 percent in the first nine months of 2017.

A robust residential construction market is projected to increase demand for construction and industrial equipment rental by 5-7 percent annually through 2019. The equipment financing market, which includes loans, leases, and lines of credit, bounced back and is expected to experience growth of 9.1 percent in 2018 due to greater business confidence and expansion. But overall, sales for the U.S. commercial equipment rental and leasing industry are forecast to grow at a 4.03 percent compounded annual rate from 2016 to 2022, slower than the growth of the overall economy.

Manufacturing uptick

Manufacturing output and trade volume are important drivers of demand for the equipment rental and leasing industry. The domestic manufacturing industry enjoyed an uptick in shipment value after several years of weak or declining performance. Annual growth rates for the value of shipments for U.S. manufacturers increased 4.1 percent in 2017.

Globally, ongoing concerns over the European and Chinese economies and slowing growth among developed countries have subdued total trade and output growth to below long-term average rates. Efforts to bring manufacturing back to the U.S. from low-wage nations is playing a part, along with greater business and consumer spending on goods.

Construction is thriving, but…                                                                      

Private construction spending increased 5.8 percent in 2017, driven by strong increases in residential, commercial, and transportation. However, on the flip side, contractors are renting less and buying more equipment as price growth slows, construction expands, and they can better cover the upfront capital expenditures and associated maintenance, service, and repair costs. 

How bankers can help commercial equipment rental and leasing firms

• Efficiently collecting rental and lease payments (payments are typically billed monthly, although some companies offer seasonal leases, which concentrate payments during peak customer business periods; the collection period averages 75 to 87 days).
  Solutions to consider: ACH services with blocks and filters, lockbox, merchant services, remote deposit capture, remote cash deposit
  
• Managing cash given seasonal or cyclical slowdowns in demand (especially for the construction industry and certain categories of the transportation industry).
  Solutions to consider: Line of credit, sweep services to line of credit and investments
  
• Funding capital investments in facilities, equipment, technology and acquisitions to grow revenue and improve operations.
  Solutions to consider: Real estate loans, term loans, M&A advisory services
  
• Maintaining market share in a competitive industry to avoid idle equipment inventory.
  Solutions to consider: Line of credit, term loans, equipment financing

An industry worth pursuing?

The commercial equipment rental and leasing industry is capital-intensive, maintaining on average almost a dollar of long-term debt for every dollar of equity, so bank borrowings are common. Firms typically have significant investments in fleet holdings, yet it also is vulnerable to economic trends and the related effects on customer industries and end markets. Additionally, these companies face competition from equipment manufacturers and dealers that often offer rental or lease programs directly to customers or assist in arranging financing. 

These are among the reasons the business failure and merger rate for commercial equipment rental and leasing firms from the end of 2016 to the end of 2017 was 16.48 percent, higher than the average for all U.S. businesses.

But there are definitive bright spots in the industry, especially for construction and manufacturing equipment. For example, United Rentals, the world’s largest equipment rentals company, saw second-quarter profits jump to $183 million, nearly double from a year ago, and their revenues for the quarter reached $1.89 billion, up 18 percent from Q2 2017. The stellar performance was driven by tax reforms passed last year, as well as mergers and growth in the construction industry.

Want this kind of in-depth analysis on more than 300 other industries?

All of the industry information in this post came directly from the Vertical IQ Industry Profile on commercial equipment rental and leasing. Reviewing this profile, or even doing a quick 5-minute review of the industry’s Call Prep Sheet, gives you valuable insights into your commercial equipment rental and leasing banking prospect — their opportunities as well as the issues that may be keeping them up at night.

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