The industry can weather further interest rate hikes and an economic downturn better than other lenders, he says
Prime commercial asset finance lenders are well-positioned to weather economic issues, including planned government infrastructure spending, supply chain issues pushing up asset prices, fixed rates, and any drops in consumer or business confidence, according to an industry CEO.
“I expect our industry to withstand further interest rate increases and, if it arises, an economic downturn better than lenders that fund discretionary assets,” said Phillip Crossman (pictured above), CEO of equipment and car lender Metro Finance.
“The assets we finance are intrinsic to business operations: tradies need their utes to do their job, so they can be counted on to prioritise payments. The other favourable aspect of asset finance is that the interest rate is fixed for the life of the facility.”
According to CAFBA estimates, the total receivables in the Australian equipment finance market were approximately $100 billion; while total new equipment finance (including fleet leasing) was estimated by AFIA to be at $36.6bn as of June 22, compared with $34bn on June 30, 2020.
“Add in the infrastructure spending that our governments have committed to over the next 10 years and their commitment to more social housing, which will drive construction, and you have a good long-term environment for asset finance lenders,” Crossman said.
Over the four years to FY2025-26, the government has earmarked a total of $255bn in funding to infrastructure – a 2.7% rise over the previous year’s allocations. At Metro, 44% of commercial settlements are for businesses in the construction and transport industries.
Moreover, tighter supply chains have underpinned the value of existing cars and equipment, rather than creating credit issues for the asset finance industry. A price analysis of 900 new car models by Drive found that listed prices grew by an average of 14% from January 2019 to January 2023.
The federal government’s FBT concession has led to a growing appetite for electric vehicle financing, particularly in novated leasing volumes, with one in three car loans now being for EVs and PHEVs compared with one in 20 in the commercial channel, Metro found.
Metro Finance: a case study for the industry
Founded in 2011, Metro Finance has experienced consistently strong business appetite for financing, having achieved 30% year-on-year growth over the past five years. The non-bank recently won the 2022 CAFBA Financier of the Year, Credit Team of the Year, and Settlement Team of the Year awards.
“Primarily represented by CAFBA, the commercial broker industry in Australia offers borrowers an important alternative source of finance to traditional bank lending. In the small-ticket asset finance market, third-party introducers account for 50% to 60% of all originations,” Crossman said.
Metro lends to prime SMEs and individual borrowers in stable industries that purchase auto and equipment assets but avoids those industries that are prone to volatility or assets that have poor resale value. The firm’s loan portfolio is highly diversified, with risk diversified across geographical regions, borrower industries, and asset types.
Metro takes a tailored approach to its lending through high levels of personalised service, advanced back-office technology, and a user-friendly portal. Brokers can approach the lender to work through different scenarios for a customer, with each case assessed individually to determine how the lender can help the borrower achieve their goals.
“We don’t run an opaque credit score model to process applications,” Crossman said. “Instead, brokers have direct access to a range of Metro personnel to discuss and workshop deals with them. Alternatively, when an application is straightforward, we can use streamlined processes to complete it quickly. Technology is critical for delivering speed and cost-effectiveness – for instance, customer onboarding and risk assessments. We can do deals in under two hours.”
Metro Finance is continuing to experience very low arrears and defaults, and Crossman expects any dip in demand will just be part of the economic cycle.
“Capital markets are already factoring in interest rate declines,” Crossman said. “When inflation looks like it’s tamed and if the economy experiences a downturn, we anticipate the Reserve Bank will reduce rates to soften the landing.”
Metro has a network of 3,700 brokers nationally and has accumulated around 50,000 customers and a loan portfolio of $3bn, settling an average of $150m per month. Last month, Metro closed a $500m debt funding deal which attracted investors from Europe, Asia, and Australia.
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