Equipment leasing has been around nearly as long as the industrial revolution, and hasn’t changed much since: It’s still an old-line business with a lot of paperwork.
But Enverto, a new West L.A. financial firm, wants to take the business from paper applications to mobile apps.
The company’s co-founders see an opportunity to serve millions of business owners who took some lumps during the recession and can’t qualify for equipment loans in today’s stricter banking climate. They also think there’s appetite from investors to get in on the equipment leasing market. And they believe the Internet is the way to reach both borrowers and investors.
The company spent more than two years developing its own online application and underwriting system – one that will eventually let investors buy into the firm’s equipment leases.
Now, armed with a new $100 million credit facility from New York investment firm Guggenheim Partners to provide the initial fuel, Enverto is preparing to roll out that system, IMCA Express, next month. Companies looking to lease equipment and vendors who want more options to finance customers will be able to sign up through Enverto’s website and apply for loans online. A smartphone app is on the way.
The system uses a proprietary algorithm, 15 years of industry data and a paperless documentation process to underwrite equipment leases in as little as three minutes.
“We’re just taking the normal processes that equipment financing companies go through today, and we’re using technology to make it faster, easier and more intuitive,” said Enverto Chief Executive Charles Anderson.
The two dominant forces in equipment leasing, GE Capital and Wells Fargo, as well as local banks that work with small businesses, increasingly decline to finance borderline cases that don’t fit neatly into a now-smaller box. For Enverto’s co-founders, that looks like an opportunity.
“We’ll take on the business banks won’t do,” said Blake Johnson, Enverto’s chairman. “And as we know now, they’re extremely tight with who they’re lending to. It’s almost ridiculous when you step back and look at it.”
Lease on life
Equipment leases allow companies to get new equipment even if they don’t have the money to buy it and can’t get a typical loan. Under a lease agreement, Enverto and other lenders buy the equipment, then rent it to the customer.
Johnson got his start in the equipment leasing business fresh out of college when he went to work at Balboa Capital in Irvine. A few years later, he set out on his own, buying into a leasing company called Capital Network Leasing Corp.
That firm was hit hard during the downturn, when companies weren’t spending money on equipment – or anything else – and Johnson shut it down, then founded West L.A. equipment leasing company IMCA Capital in 2009.
Anderson and Wesley Lones, Enverto’s chief revenue officer, both worked with Johnson at IMCA for several years and own part of that firm.
IMCA is a more traditional, labor-intensive finance company with a lot of account executives making phone calls to potential clients. But the team sees Enverto, launched in November, as an investment company, not just a lender.
Enverto will initially fund deals that come through IMCA Express with its Guggenheim credit line, but executives intend to develop the company into something similar to a peer-to-peer lender, such as San Francisco’s Lending Club. That company allows individual investors to buy portions of loans made to small-time borrowers – often consumers looking to refinance credit card debt.
In this case, Enverto wants to let investors participate in the equipment leasing market, though it could take years for Enverto to prove its underwriting system works to investors’ satisfaction.
Since starting out, Johnson has collected data on the more than 6,000 leases his companies have done. At Enverto, they’re using that data to build a system they believe can more accurately and efficiently underwrite deals.
“We’ve been collecting data going back to 1999,” Anderson said. “We have data on millions of businesses, so we already have an installed knowledge base. That’s where we have a real head start with making these credit decisions. We know that the farmer in Georgia pays his bills. Maybe he pays them late, but he pays them.”
To take advantage of this trove of information, Johnson in 2012 hired Justin Acciavatti, a “quant guy” with a Duke University M.B.A., to look for patterns in all those numbers.
“He essentially spent a year and a half looking at that data, deconstructing the way the industry and leasing companies look at the credit profile of a business,” Lones said.
This approach revealed some truths that go against banks’ conventional wisdom, he said.
“What we’ve learned in reconstructing and building our own algorithm is there are things that really don’t have a significant impact in predicting default, such as credit score,” Lones said.
One recent example of the company’s process, Lones said, was a trucking company that last month got a new $200,000 trailer financed by Enverto.
“In 2009, the owner had a blemish on her credit report because she co-signed for a piece of property for her brother,” he said. “She had fantastic pay history through the financial crisis, but just because of that bad judgment call, she was unable to get financing from anybody.”
Once Enverto’s algorithm determined the company was creditworthy, one of the firm’s 20 underwriters worked to clear up the reasons behind a few credit black marks. Anderson said they are mostly concerned with the cash flow of the core business and can overlook nonbusiness-related dings to personal credit.
One major reason a business might want to lease rather than own much of its equipment is to appeal to a potential buyer, said Craig Enenstein, the founder of West L.A. private equity firm Corridor Capital and an investor in many companies that have financed equipment.
He said buyers often like companies with clean balance sheets they can remodel to their specifications, and they find it easier to get cash-flow loans for businesses that own fewer assets and are likely to have lower maintenance spending.
Bank loans often have terms that preclude or heavily restrict new capital spending, but leases are usually exempt, which makes them a backdoor way for companies to add the equipment they need without waiting for bank approval. Loading up on lease payments can strain cash flow and leave companies more vulnerable to a short-term dip in sales, but it’s a way for businesses to acquire necessary tools without buying them.
“We’ve financed everything from basketballs for the Houston Rockets to servers for Amazon,” Johnson said. “We’ll finance tables, chairs and knives for restaurants; styrofoam growing trays for farmers. We really are pretty liberal when we’re classifying what’s deemed as equipment.”
The interest rates Enverto charges on equipment leases range from 4 percent to 7 percent on the low end, up to the high teens for riskier customers. This pricing is comparable with other nonbank lenders, and the relatively high interest rates are appetizing for investors who can stomach the risk.
Those risks could include anything from a small company cutting corners on equipment maintenance to a business that loses a key client and has lease payments on a piece of equipment that isn’t generating revenue.
Johnson believes there’s a huge opportunity in financing equipment for viable borrowers who just don’t qualify for bank loans, and that using technology is the best way to capture it. The team plans to use trade shows and established vendor relationships to continue to get the word out about IMCA Express.
And unlike banks, he doesn’t think the company is turning away good borrowers.
“If somebody is unable to get financing with us, it’s extremely unlikely they’ll be able to get financing ever,” Johnson said.
