Down and Dirty: Competition Gets Messy as New Lenders Crowd the Market

About five or six years ago, the lending opportunity in the powersports market was wide open. As the industry recovered from the financial crisis, there was more demand than there was supply for powersports financing.

Now, times have changed. Several new lending companies have entered the space — from captives to independent finance companies to startup leasing providers — over the past few years, and in 2016 alone.

“When we looked at this market five years ago, there was really a void of financing in this space,” Vijay Patil, chief risk and strategy officer at Yamaha Motor Finance Corp. USA, told Powersports Finance. “A lot of consumers wanted to buy the product, but could not find the financing. Now, after four or five years, things have turned around quite a bit, and it seems there is more of a supply of credit than the demand that exists out there.”

The new entrants, however, can become long-term players if they have sufficient financial strength and credit facilities in place, said MotoLease’s Managing Partner Emre Ucer.

Some of the new entrants include Yamaha Motor Corp. USA’s Cypress, Calif.-based financing unit, which launched in March 2015; Yamaha Motor Canada Ltd.’s captive, Yamaha Financial Services, which debuted in July 2016; and Polaris Industries Inc., which partnered with FreedomRoad Financial to form a new “captive-like” retail finance program called Performance Finance, in September 2016.

Additionally, Citi Retail Services entered the space in December 2016, teaming up with Kawasaki Motors Corp. USA and Bombardier Recreational Products Inc., to offer a private-label credit card program.

Several independent finance companies have joined the marketplace as well. American Cycle Finance, formerly known as Ride Today Acceptance, launched in January 2015; CycleOne Financial started operations in April 2015; and Roadrunner Financial launched in June 2016. Most recently, RTO Cycles, a lease-to-own powersports company, launched in January of this year, and Speed Leasing launched last month.

There have been a few notable exits, too: Merrick Bank stopped funding powersports loans in January 2016, and Chrome Capital stopped accepting lease applications in September 2016, after a halt in investment funding from Leucadia National Corp.

Mirroring Auto Finance

Though several years behind, the powersports industry is taking a similar path as the auto industry, sources told Powersports Finance. But, this could be a bad sign for new entrants and those eyeing the market.

“As I understand it, [auto finance] has certainly reached the previous peak” that the industry was at before the recession, said James Hardiman, managing director of equity research at Wedbush Securities Inc. Powersports has not reached that peak in the credit cycle yet, he added, so the belief for new entrants might be that there is still some “leg room” for growth.

However, it might be too late for startups to test the waters.

“The size of the market is not big enough to have 10 or 15 lenders that are dedicated to this market,” Patil said. “If you think about the number of new motorcycles that were sold last year — half a million — compared to 17.5 million auto vehicles, you can imagine the size of this market. It’s relatively small, and there are a lot of players out there who have already been in the business for many years, and they are now reaching a point where it is very hard to acquire new customers — unless you compromise on your affordability or your credit programs.”

The new entrants can make it a little more difficult for independent lenders to compete, said Donal Hummer Jr., ThunderRoad Financial’s chief executive and founder.

ThunderRoad continues to add dealers to its network, and applications are coming in the door each day, he said. “But at the same time, when I see all these other entrants coming in, I want to make sure that we can remain first and foremost in the dealers’ minds,” Hummer added.

For an independent finance company that is planning to enter the oversaturated market, “I would be cautious,” Yamaha’s Patil said. “I agree, we [the industry] are a little bit behind in terms of the cycles in auto, but we are right on the same path.”

Lenders need to have a deep understanding of their book of business, and “if you don’t, you will fail fairly quickly and cost your shareholders a lot of money,” said Ben Donnarumma, managing director of American Cycle Finance. “The [auto] industry is feeling this now, because they did a lot of things to move units and lost track of profitability. They [auto lenders] stretch on a lot of loans — LTVs are too high, underwriting is too loose, and they will feel that pain. We don’t chase our way to the bottom. We stay consistent, and we keep to our niche.”

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