Unlocking Profitability in Micro-Ticket Equipment Financing

The underlying principles of commercial equipment financing are the same for all deal sizes, but micro-ticket transactions have unique attributes that separate them from higher-ticket categories, according to Jim Jackson, co-Chief Executive Officer at The Alta Group and leader of its Merger and Acquisition advisory practice.

In a recent article in NEFA Newsline, the magazine of the National Equipment Finance Association, he takes a closer look at this important segment of equipment finance, in which the credit decision for small-business owners focuses more on payment willingness than the more traditional payment ability.

“Given the low monthly payment obligation, usually less than $200, the assumption was that anyone could feasibly make the payment,” Jackson writes. “The credit decision, therefore, had to take into consideration how willing the obligor would be to make that payment over the term of the transaction.”

Micro-ticket Competitors: Credit Cards and Cash

The micro-ticket sales process is more challenging than the small- and mid-ticket offering for several reasons, according to Jackson.

“Many vendors and dealers of micro-ticket products don’t realize that a financing option exists,” he writes. “Most brokers and third-party originators will not offer micro-ticket transactions as they feel that fee income isn’t sufficient to cover costs.”

The competition, then, generally isn’t another micro-ticket finance company, but instead is a cash or credit-card payment.

Jackson says business development representatives were trained to educate the vendors and dealers to sell a monthly payment amount to the obligor and not to focus on the list price of the product being financed.

He adds that pricing typically isn’t a major factor in a customer’s financing decision.

“A typical micro-ticket lease transaction for $4,000 with a 15% residual value at 36 months at a 27% target yield would result in a monthly payment of $149,” Jackson writes.

Terms of 24 months or less on a typical transaction are usually cost-prohibitive because the amount of gross margin provided is insufficient to cover the fixed costs of originating and servicing the transaction. So micro-ticket finance companies typically rely on fee income and month-to-month lease extension payments to achieve their targeted returns.

Efficiency is Essential  

Jackson points out that a high-flow, low-touch technology platform to quickly process applications and service portfolio contracts is a must. Expect to see an increase in artificial intelligence applications industry-wide, as well.

“In summary, I would suggest that the primary distinguishing factors of a micro-ticket equipment finance offering are driven in large part by customer payment behavior patterns,” he writes. “Structuring a transaction with a low monthly payment that is affordable to the customer improves the likelihood of strong payment performance in the firm term as well as a high likelihood that the customer will choose to continue to finance the equipment on a month-to-month rental at lease maturity.”

Indeed, with the right technology processing platform, a disciplined approach to the type and price of the equipment being financed, and a persistent collections effort, micro-ticket commercial finance companies can be profitable and successful, Jackson adds.

About The Alta Group

The Alta Group has deep expertise in designing creative customer financing solutions for manufacturers and distributors across all geographies and equipment types. Our advisors can structure competitive and flexible customer financing programs, including lifecycle and managed services models, that solve the distinctive needs of manufacturers and vendors. Our knowledge allows us to design and deliver highly customized solutions across the globe. Contact us to learn more.

James R. (Jim) Jackson Jr. is co-Chief Executive Officer at The Alta Group and leader of its Merger and Acquisition Advisory Practice. Jim has more than 35 years of operating experience in the equipment leasing and finance industry. He is recognized as an industry leader and has written numerous articles on M&A-related activity.