Storm Clouds Gathering for Construction Lenders

Recent economic forecasts suggest difficult times may lie ahead for lenders who finance construction equipment purchases. As the industry enters its slower autumn season, experts predict rising delinquencies and defaults in this sector. Lenders who take preventative action now can mitigate risks and protect their bottom line. 

Research by the Construction Financial Management Association reveals troubling signs. Construction equipment loan delinquencies rose 15% in the second quarter of 2023 compared to the same period last year. One major industrial bank reported its construction portfolio saw a 20% increase in loans over 90 days past due. 

Industry analysts cite several factors driving this trend. Rising interest rates make financing more expensive, depressing demand. Meanwhile, supply chain disruptions continue hampering projects, putting pressure on contractors’ cash flow. With fewer new projects breaking ground, used equipment values are declining, reducing collateral asset recovery in default situations.

Proactive lenders can limit their exposure through several strategies:

  • Maintain close communication with borrowers to detect early signs of financial difficulty. Work with struggling customers to modify payment plans if necessary.
  • Closely monitor collateral assets. Be aware of equipment location and condition. 
  • Prepare for seasonal fluctuations that could further stress borrowers’ finances.
  • Ensure internal collections teams are adequately staffed and trained if defaults rise. Consider reputable third-party support if needed.
  • In some cases, personal “door knock” visits to delinquent borrowers can lead to breakthroughs in finding workable solutions.

Taking prudent steps now to understand portfolio risks, anticipate challenges, and support customers will help construction lenders ride out near-term turbulence. With thoughtful preparation and attentive account management, the coming months need not spell financial stormy seas for lenders invested in this vital industry.