Lenders and lease finance companies that finance fleets of ten to five hundred vehicles and/or equipment units know. The multiplied risk exposure you face in any environment demands proactive portfolio management. That’s especially true in today’s tightening credit environment.
The increased risks lenders face today are the product of a variety of circumstances. The Federal Reserve has raised interest rates over 400 basis points in the past year to curb inflation, driving up borrowing costs and slowing economic growth. Meanwhile, used equipment values have declined up to 20% or more as supply chain issues that recently hampered new equipment production have normalized.
This perfect storm of higher rates, reduced asset values, and slower business activity is driving overall loan performance and default rates higher across multiple industries. Topping all this off is the difficulty and expense associated with recovering collateral assets that may be spread across a wide area.
Five Steps to Manage Risk in Your Fleet Portfolio
Fleet operators’ large loan balances and multiple units make them especially vulnerable, when rising delinquencies or defaults can quickly spiral out of control. By taking the following five steps, fleet lenders can mitigate risk and maximize returns:
1. Establish conservative underwriting criteria. With used equipment values declining, consider requiring at least 30% down payments on new originations. Adhere to strict debt-to-income ratios below 30%. Carefully evaluate borrower’s operating history, expertise, and credit.
2. Structure shorter loan terms. With interest rates’ potential to rise further, opt for 2-3 year payback periods rather than 5+ years to limit rate exposure. Consider requiring periodic curtailment payments to accelerate principal reduction.
3. Monitor portfolio performance closely. Delinquency rates have risen 45% year-over-year, demanding closer monitoring. Review reports frequently and follow up quickly on overdue accounts. Identify any correlations between late pays and geography, equipment type, or industry.
4. Incentivize early payoffs. With used equipment values falling, motivate borrowers to pay loans off faster. Offer prepayment discounts or rebates to reduce lender’s collateral risk exposure.
5. Move swiftly on repossessions. When defaults occur, rapidly recover units to minimize loss in value. Perform inspections, take photographs, and re-market repossessed equipment ASAP. If the assets are widely dispersed and possibly difficult to locate, the use of advanced telematics in appropriate equipment will allow you to monitor both the condition and the location of the assets.
By incorporating conservative underwriting, proactive monitoring, and decisive action on delinquencies, fleet lenders can promote portfolio health despite economic headwinds. Maintaining strong performance enables sustainable lending to this vital market segment during volatile times.
Where to Turn When You Need a Turnaround. Fast.
As economic conditions put pressure on fleet loan portfolios, lenders can turn to expert partners like Asset Compliant Solutions (ACS) for support. ACS has worked with leading asset-based lenders across the U.S. for over 25 years to improve loan portfolio performance throughout the lifecycle.
From augmenting in-house collections teams with proven talent and nationwide recovery agents, to providing full-service recovery and remarketing of collateral across the country, ACS has the expertise and capabilities to help fleet lenders navigate today’s challenging environment. By partnering with an established industry leader like ACS, leading lenders are taking proactive measures to reduce risk and maintain the health of their fleet loan portfolios.