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Top originators in the commercial equipment finance and leasing industry embrace rate questions, because they fully understand that:
- Industry yields are determined by the correlation between risk and reward. The market sets the rate - not individual originators. The industry provides a broad range of yields based upon the strengths of each opportunity.
- If the originator's offered yield is significantly above market, for the risk they are willing to assume, then their business activity will quickly be reduced to near zero activity.
- If the originator's offered yield is significantly below market, for the risk they are willing to assume, then their business activity will quickly increase. However, profits will be reduced and potential write-offs may increase over time.
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There will always be competitors with lower rates or lower credit requirements, but rarely do competitors have both. If they do, it will usually be for a temporary period. (The market does not allow absurdity.) The market works.
- Industry participants have minimum yield requirements and maximum risk tolerance matrices which originators must work within. Not every opportunity will fit properly within the specified box. The originator's responsibility is to fully understand their tolerance box and to find, win, and fund transactions within those parameters.
- Rates are important. However, cash flow considerations are also influential in an end-user's decision-making process. Structure can often be of greater cash-flow savings than the rate. As market rates have increased from historical lows, structure has re-emerged as a primary factor in winning or losing transactions. Top originators understand the market (and competition) and often suggest structures which address cash-flow benefits.
It is the originator's responsibility to maximize returns by providing a superior, value-added service. It is the originator's responsibility to provide the best program that the client deserves based upon the strength of the transaction (including the financial strength of the client, the collateral being acquired, the term being requested, and the current market conditions).
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