Poor risk management is creating lender exposure issues
Hello, and welcome to The Dig. Join Equipment Finance News editors as they connect with leaders in the equipment finance industry on both the lender and dealer sides of the table to discuss new developments, market analysis, trends, tips, and more. We aim to create more productive dynamics between dealers and lenders to make the industry stronger and more profitable. This podcast will help take the industry and you to better results. I am Johnnie Martinez, senior associate editor of Equipment Finance News.
Johnnie Martinez II:Equipment Finance News is the one publication for both dealers and lenders filling a critical gap in the market. Find us at equipmentfinancenews.com. My name is Johnnie Martinez. I'm the senior associate editor at Equipment Finance News. And here with me today is RJ Grimshaw, a long time veteran of this industry, and I'll let him introduce himself and his role in equipment finance.
RJ Grimshaw:Well, I appreciate that, Johnnie. And I always love our conversations that we have about the industry, and everyone has a different take on it. Yes. I'm RJ Grimshaw. Been in the industry, I hate to say a long time, but a long time.
RJ Grimshaw:I absolutely love this industry and what it does for our economy as well as our business owners across the country. And, you know, as we're going to talk about, we're definitely in an interesting time. It seems like every year we're saying that, but there's no 2 years that are the same and specifically right now with people waiting on the Fed and we have an election and things of that nature, it's a pretty dynamic marketplace that, it doesn't matter what side of the fence you're on. If you're a manufacturer trying to sell more equipment, if you're the finance company trying to finance the equipment, if you're a service provider, you know, everyone is is in this same timeline of events and and everyone's trying to figure that out. But at the end of the day, it's really coming down to technology, processes, and and the people you have on your team.
RJ Grimshaw:And,
Johnnie Martinez II:you know, when you start talking about managing the the people and managing the the processes. Right? For for you and then and the roles you've had and the roles you've been in. Right? How do you really go about that?
RJ Grimshaw:Yeah. It's interesting. A lot of the the clients I work with or companies I've been part of, typically, that knowledge base is in someone's head. Right? You know, they they do it on a daily basis.
RJ Grimshaw:They understand how to do it. They're living it. It's getting it out of their head into a document from a process perspective because that's the way that you that's the only way you can scale it. By that, though, you have to analyze those processes on an ongoing basis where they're where they're mapped out, you know, it's either a document or a Visio. And then your, your team members that are following those processes on a daily basis, they're able to fulfill the requirements of their customers because now they have a defined process.
RJ Grimshaw:So really that's, that's the first step. And again, it's a living, breathing process and more of a culture philosophy, Johnnie, than it is anything else. You know, so many companies are like, oh, you know, we don't need a document or we haven't changed the documents in 5 years. Well, the world we live in stuff changes in 6 months. What's normal today is different.
RJ Grimshaw:It could be different in next year. It could be different next week. So that's what my my approach is or or what I I try and coach and teach our clients is, you know, document it, but always have that document ready to be edited and track those edits because the marketplace is changing at such a dynamic pace.
Johnnie Martinez II:You mentioned the team members aspect to it. We work and live in an environment that is so rapidly changing, and sometimes that's this processes and systems side, but sometimes that's the people side, right? When you start looking at turnover and mobility and we've got a layer of employee mobility that we really haven't seen in the post pandemic world, you know, when you have that, how do you kind of bring those people into the system, right? When you start seeing that, you know, people are changing your contact from a month ago, maybe in a different spot, and you've got to kind of bring this new employee on and there's just all these moving parts, how do you kind of work people into the system and, you know, get them involved in in the process?
RJ Grimshaw:Great question. And that you're you're right. The bubble level of engagement and doesn't matter what, you know, statistic you read about that, but it's at an all time high in terms of employee engagement with their company. And that's driven by a multitude of reasons. One, the the stresses that we are currently living in in terms of the cost of inflation and and things of that nature.
RJ Grimshaw:But to get buy in from your team, I'm a firm believer that you have to have a opportunity and a culture where they can share their ideas due to the fact that they're living in the trenches on a daily basis. And however, that starts with education on the organization and providing context of what you do on a daily basis and always staying focused on the North Star, which is the customer journey and how we're how we're treating our customer. If you do those things, you're going to attract the right people to come in and facilitate those processes and procedures. And if you're really good at hiring recruiting, Johnnie, you're actually going to hire people that are gonna come in and able to understand the processes and make adjustments to make your company that much better too. It helps a 110% with the back end issues, but also you have to allow these people that come into the organization.
RJ Grimshaw:And again, I'm not talking about your core, what we call vital employees that excuse me, your functional employees, which are gonna come in. They're gonna follow the processes on a daily basis. However, you as a leader of the company, you have to have those processes in place. The next part of that is that vital employee that I'm speaking of, of when you raise your bar and you start attracting a higher caliber, you know, people to your organization because of the culture, they're going to come in and be able to take you to another level. And so many business owners don't realize that today, the world we live in is a different skill set than what it was 6 months ago or even a year ago, like we were saying.
RJ Grimshaw:And you have to allow people to change and provide that feedback to leadership and management, to stay current of current, you know, what the the again, the world that we live
Johnnie Martinez II:in. Right. And, you know, you talk about the the feedback process. Right? It's just, you know, it's easy to look at it as a a very customer centric thing, but it it does play a role on the internal side of organizations as well.
Johnnie Martinez II:Right? Feedback, you know, you need to get those loops started, those loops going, and and have those conversations internally and externally.
RJ Grimshaw:Exactly. And and and you can tell at least I can tell real quick if I'm engaging with a new company that I'm talking to. And if I start hearing words of assume, I think, I hope, I believe that's a culture issue that there's no accountability in those type of organizations. We want to pivot that that that mindset to I own, this is how we measure it. This is how we define success.
RJ Grimshaw:Then you can start building out those processes to build it out when you have those. But when you're just again back to those, I call them, you know, non descriptive words and it's quick. You can, you can walk into any company and next time you're in a meeting. Listen to the people who are saying, I'm assuming this or I'm hoping this, or I think that they're not, they're not the domain experts in their subject matter, you know, in the subject matter. Right.
RJ Grimshaw:And just causes, you know, stress for everybody else. And at the end of the day, Johnnie, you can have the greatest processes and procedures, but you have to have great people and you have to know how to treat them right. And you have to give them the opportunity to excel, and be the best version that they can. So, it's really, it does start with hiring great people, but you have to have the processes and procedures in place.
Johnnie Martinez II:And in some ways, I think that's a good transition to, you know, kind of the one of the big themes on EFN in criminal finance news this month is kind of the risk management conversation. And then to your point, right, the process and procedures are part of that, but the people are part of that too. And you have to sort of work in both realms if you're really gonna have your company in a in a protected space.
RJ Grimshaw:Right. And and to your point, so many customers, especially this year, you know, everyone was everyone's portfolio performance over the last, call it 5, 7 years has been spectacular. Right? Better than average, better than historical averages. That's all we heard.
RJ Grimshaw:So everyone was just focused on the origination aspect. How much capital can we deploy at a pace? Because that's where it's at. Well, all of a sudden, like anything, you, they took their eye off the portfolio management aspects and the risk mitigation part of the business. And all of a sudden, they started exposing these issues because they weren't focused on that.
RJ Grimshaw:And I've been spending a lot of time again, just I mentioned earlier, processes and procedures should be reviewed on an annual basis. And you should keep a red line if you do that annually in terms of getting board approval or approval for management, you keep a running red line of the adjustments you want to make. That's what we would do with our credit policy to make those adjustments. So you weren't sitting in a room 11 months later saying, hey, what happened 10 months ago that we wanted to change, but I forget. So that's where I'm speaking to a living document.
RJ Grimshaw:And as soon as you're able to do that, any business we did at Unify, you're able to scale the business. We were able to grow the business and scale after we had the processes and procedures. And then we started identifying amazing people. So again, it's it's almost like a chess game. You're you're you're you're moving your pawns and then also evaluating all facets of the business.
RJ Grimshaw:Like I said, people took the eye off the ball in regards to their portfolio performance because it was going very well. Now there's challenges. So guess what? They're putting focus on it, which means the origination part of it is now struggling because people exited out of markets or maybe raised rates. And now they're going back into the market saying, oh, you know what, we really do want your business, Johnnie.
RJ Grimshaw:We just decided that we wanted to take a pause. And that's the hardest thing to do in the world is to go from an originator perspective. If you're a bank owned leasing company or just a finance company to to come in and out of the marketplace. There's no consistency around that. And actually, it causes harm to all of us in the industry because it puts all the manufacturers and dealers and vendors on, you know, in the defensive mode.
Johnnie Martinez II:We we we've talked before and, you know, you've talked about part of this. Right? The relationship component of this industry, it does have that kind of connection to the risk, the risk management side as well where it's, you know, trust is a big part in both. And you got to have that established when you're, you know, you're going to, your point, the vendors and and the dealers and the customers and just there has to be that that relationship, that trust if they're gonna put risk in and you're gonna put risk in. Right.
RJ Grimshaw:Yeah. There has to be trust between both parties because you're at the end of the day, you're both investing resources into the relationship and you have to have that trust and transparency upfront, in in order to to have a meaningful and relevant relationship between both parties. They have to have confidence in what you're providing and you have to have confidence in what they're providing you. And if there's a disconnect between the 2, the relationship's not gonna work, which is okay. I would always say, that's okay.
RJ Grimshaw:We're maybe we're off timing wise. Maybe we're just not the right fit right now. We maybe are the right fit down the road.
Johnnie Martinez II:The the collaboration component of this industry. Right? There's so many people in it, but it's a lot of working together and working on these different things. And, you know, sometimes it's not a right fit for you, but it's a right fit for somebody else. And, you know, everyone trying to work together competing still, but also cooperating and trying to make sure that the industry fills the needs that are there.
RJ Grimshaw:That's that's why I love this industry is because of that reason right there. And I'm so glad and happy that that you've identified that. And and, you know, you you they were running I was at an event last Monday. I was at the actually at the EF CARES golf outing, in in New York, a fundraiser. And I stood on the board for E.
RJ Grimshaw:F. Cares, but there was a son of someone who is in our industry and I was talking with him and he's a junior college maybe and talking about our industry and as we all joke that are in the industry. Right? When you come in, you're not getting out. We don't let you out.
RJ Grimshaw:And however, the reason people don't leave is everything you just alluded to. I'm sitting in a in a fundraiser for the industry and everyone's competitors in the same room and you would think that everyone's friends. Right? And we all look out for each other, primarily protect each other and good competition is good. And we all have our own niches.
RJ Grimshaw:What we're good at and shrinks at. We talked about this. I come from an abundant mindset. I'd rather bring in a friend of mine or someone I know in the industry that can take care of a need of a dealer than I would have them go search for it. That's the value I can add because everyone's money's green.
RJ Grimshaw:Everyone has a rate. Everyone has an approval ratio. It's the actual value that you're bringing to a relationship. And I don't care if you're the funding source, the dealer, if you're the dealer to the funding source, if you're a service provider in the industry like you are or other organizations, you always have to be looking for areas where you can provide additional value other than just doing your core, you know, your core competency.
Johnnie Martinez II:Bringing it back to the the risk component of all this. Right? Everyone's gonna have their own tolerance as well. And part of, you know, knowing what people's tolerances are is having those conversations, those communications, say, hey. This you know, everyone's money is green, but this deal may not be my kind of green and maybe your kind of green.
Johnnie Martinez II:Let's let's have this conversation. Let's see what we can do. It's
RJ Grimshaw:spot on. And we we all think we're smarter than each other. We joke about that. You know, I can write a better I I can write a better credit policy than you can write, you know, perform better and things of that nature. My buddies, we always joke joke around about that.
RJ Grimshaw:But in the same respect, you have to just stay true to yourself. They're self induced typically, you know, restrictions and and usually it's an event that happened in someone's past. It's always chuckles, you know, a certain asset type or end user profile. Maybe someone had an event or an incident before, and they vowed to themselves, they'll never do that asset again or or or work with that type of dealer again, which is unfortunate, but I go back to that's what puts the, you know, it makes it harder for all of us when an event like that happens. But trust, it's so critical in trust.
RJ Grimshaw:And and we're it's a big industry, but it's a small industry. And if you lose trust and and confidence in the marketplace, it's it's a little difficult to to overcome.
Johnnie Martinez II:Where the industry is right now, you know, it's 2024 has been a weird year for a lot of people. You know, we we're headed into the back end of it. There's a lot of moving parts that everyone are watching. Sort of where do you see the industry headed, and then what are some of the things that maybe people should watch out for to to make the best decisions they can in the equipment finance space?
RJ Grimshaw:Yeah. I'm I'm I'm very excited about the future. The reason being is that we have to go through I'll I'll call this a soft reset. We have to go through these soft resets every couple years, 4 or 5 years. And primarily what it does, it weeds out the weed, weeds out the week.
RJ Grimshaw:It weeds out the the the organizations that are committed to either, you know, the the be a finance partner. The other thing it does is it exposes inefficiencies in organizations because if you're not running efficient today in the world we live in today, first of all, you can't find, you know, you're trying to identify, you know, great people to join your organization, but you have to have to go back to the processes, technology and systems. You don't have that. You're not going to attract those people because they have the option to pick and choose where they're going to work and they're going to go to work for a company that has those proper tools. But again, back to your question, I'm ecstatic about where the future is headed because at the end of the day, business owners and companies are gonna need to continue to finance equipment.
RJ Grimshaw:And it's up to us to work with our dealers. It doesn't matter if it's a captive or third party. We drive the economy. If we're not financing the equipment for the small to medium sized businesses across the country, the economy is going to hurt. What happens is we get greedy.
RJ Grimshaw:It's self induced back to humans. We get greedy and we go all in in certain areas. So the people that went all in on over the road, okay, and knew they were going all in on over the road are now paying the price for that. If you were conscientious and had a strategic approach to it and just you weren't focused on growing your balance sheet, but you're focused on disciplined growth. You're okay right now.
RJ Grimshaw:So those are the organizations that are being are going to be stronger. And then what it all the other thing it does, Johnnie, is it brings some rationality to pricing in the marketplace. We get to a point that there's so much liquidity out there in the marketplace that it's a race to the bottom and there was no no adjustments for the risk associated with the transaction. It was all about just getting an earning asset on the balance sheet. So that's not a level set where people are saying, wait a minute here, we want to price according for the appropriate risk we're taking either on the end user or the asset.
RJ Grimshaw:And that was all thrown out the window during COVID. We were financing used assets 35% higher than what they were sold for MSRP. I would call friends in the industry and say, hey, how are you handling this? How would you do that? Because it's a time that we never went through before in terms of the inflation and lack of inventory.
RJ Grimshaw:So it wasn't sure. And keep in mind at that time, Johnnie, we weren't able to finance new equipment because there was no new equipment inventory. So, the only opportunity to grow your assets is by financing we use, which were exaggerated sell prices. So, you had to make a decision from a risk perspective and the companies that didn't put bought into that now are paying the price because they're are working out transactions that went bad from a collection, work out default situation, and they're not even gonna they're gonna get pennies on the dollars.
Johnnie Martinez II:That makes a ton of sense. And, yeah, to your point, it's the the companies that have managed the the pandemic and the post pandemic environment the best are the ones that are sorta standing tall over some of the the rubble that has been created.
RJ Grimshaw:Right. But I'm I'm excited. I I I'm really and and I would think that, you know, senior leaders in our industry, they they know that this is just part of the part of the process, part of the the the seasonality of our industry. And, the the good originators are making strategic decisions right now that will pay off in 2027, 2028, 2029. And they're investing in people and technology and things of that nature.
RJ Grimshaw:And the companies that are trying to stay status quo or have been, fortunately, they're gonna they're gonna continue to be faced with some hard times.
Johnnie Martinez II:Alright. Well, with that in mind, we will certainly watch as the the industry plays out in the through the end of 2024 and as far ahead as as 2029. And I thank you so much for for joining me today for this discussion on kind of the state of the industry, managing risk, managing relationships, and I said thank you so much.
RJ Grimshaw:Sounds good, Johnnie. I appreciate it, sir.
Johnnie Martinez II:Thank you for joining us on the dig, a product of Equipment Finance News. In addition to the dig, Equipment Finance News also hosts an annual equipment finance conference called Equipment Finance Connect, where dealers and lenders gather to network and connect around financing opportunities. We also host a lender directory, which features a selection of equipment lenders to help dealers find the solutions they need. Listeners can access Equipment Finance News, The Dick Podcast, Equipment Finance Connect, and the lender directory at equipmentfinancenews@equipmentfinancenews.com. Thank you again for joining us at The Dig, where we aim to take the industry and you to better results.
