Rarely has inflation been such a hot talking point, at least not to the degree we’ve witnessed in the past two-plus years. While its impact on the consumer sector has garnered much of the headlines, there are strong indications that businesses have not curtailed their spending on equipment. In fact, for some sectors, it’s increasing.
The Equipment Leasing and Finance Association (ELFA) tracks economic activity through its Monthly Leasing and Finance Index (MLFI-25), companies that represent a cross-section of the $1 trillion equipment finance sector. In May, it reported new business in April had increased 17% year over year. The strong start to Q2 2024 belies informal polling by ELFA that shows interest rates, tighter credit and inflation to a lesser degree are all impacting their businesses, according to ELFA President and CEO Leigh Lytle.
Closer to our office technology home—and leading this week’s State of the Industry report on leasing and financing—we asked our dealer panel to assess what impact, if any, inflation is having on customer decision-making, particularly when it comes to deciding to renew or refresh technology. Perhaps the office technology space has not enjoyed the same level of prosperity when it comes to equipment leasing.
There have been significant indirect impacts that inflation has had on the direction of the Federal Reserve regarding interest rates, notes Travis Lemke, vice president of leasing for Gordon Flesch Company of Madison, Wisconsin. In fact, he believes they are a significant driver of lease pricing.
“While other factors also have an impact on lease pricing, the direction of the Federal Reserve and the overall interest rate environment are some of the most significant inputs,” he said.
It’s not just lease rates that are up significantly; the cost of goods, delivery fees and fuel have also spiked compared to three or four years ago, according to Josh Salkin, a partner with EDGE Business Systems, located in the suburbs of Atlanta. And while it’s a situation that has plagued all business sectors, dealers such as EDGE have had to make adjustments.
“It feels like there’s more pressure on saving money and competition is trying to race to the bottom more than ever before,” he said. “We try to address this with longer terms, making sure all accessories are still being used and even considering smaller devices as clients’ needs for copying and printing have decreased.”
Bottom-Line Hit
Inflation has created bottom-line impacts felt by dealers. According to Mason Smith, the president and CEO of MTS Office Systems in Greenville, South Carolina, the higher cost of equipment and bloated lease rates have taken a bite out of profits.
“Our sales team has had to get creative in some situations to combat this. However, our rates are still in line historically with what I have seen in the industry,” Smith said. “In some situations, we have also proposed a longer lease term to combat the higher costs.”
That inflation has permeated both the consumer and business markets has helped in setting expectations, points out Vern Hydorn, senior vice president of sales for NBM Inc. of Burlington, Massachusetts. Fortunately, it hasn’t prevented end-users from taking on new equipment.
“The days of extending leases were more prevalent in 2020 and 2021, which I think had more to do with uncertainty than anything else,” Hydorn said. “Things have gotten back to normal in terms of customers asking us to buy out their contract at the end of the lease. Some will want to continue with a reduced rental on their current equipment and just go month to month at the same payment, which is frustrating. For the most part, if feels like 2018-2019, with the majority of clients doing 3-5 year new equipment leases.”
Status Quo
Like NBM, Plus Inc. of Greenville, South Carolina, is seeing its share of clients seeking to extend leases at a lower rate. David Carson, president of Plus, notes the incidence of fair market value lease buyouts has increased, which still gives the sales rep some pocket money. The lack of technology enhancements has made upgrades an unnecessary investment for many clients.
“Less and less people are upgrading,” he said. “Some manufacturers have models that have been out for six or seven years. So if they did a four-year lease when the machine came out, we’d be refreshing them with the exact same model they already have when the lease expires.
“For us, leasing is an asset for the customer, whereas most dealers use it as an asset to keep selling new machines. We just want to give the client another option.”
