Federal Loan Guarantees for Industrial Equipment Finance

Should federal agencies offer loan guarantees to increase available equipment financing?

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Executive Summary

The United States has run an annual goods trade deficit of more than $1 trillion in recent years, a gap that closes only by producing far more at home, both for export and to replace what the country now imports. Reindustrializing America will require hundreds of billions of dollars in industrial equipment to be financed and deployed over the next decade.

After years of industrial neglect, compounded by financial regulations, America’s equipment finance market is currently not up to the challenge. Many American banks have pulled back from this market, especially in recent years, driven in part by capital rules that make it relatively less profitable to offer equipment financing and leasing than other products. Although private credit funds and specialty lenders have filled the gap, they often charge higher interest rates and have shorter investment time horizons.

American industrial borrowers, especially small- and medium-sized businesses, face high rates and short payback periods (or “tenors”) on equipment loans and leases that do not appropriately account for the value of the equipment backing those loans, making it hard to finance the equipment necessary for reindustrialization.

Federal agencies such as the Department of Energy, the Department of War, the Small Business Administration, and the Export-Import Bank should use their existing loan guarantee authorities to create programs, in partnership with banks and other lenders, that guarantee a share of the collateral or residual value of qualifying equipment loan and lease products. Congress and the Trump administration should also pursue industrial equipment finance loan or loan guarantee programs as part of a comprehensive industrial investment strategy.

The Policy Question

Federal agencies use loans and loan guarantees to accomplish a wide range of policy objectives, from financing energy generation and transmission to supporting America’s defense supply chains to fostering the growth of American small businesses. Equipment finance serves important objectives as well: reindustrialization and the benefits that come with it, including job creation, innovation, supply chain resilience, and the deepening of America’s defense industrial base. Equipment loans and leases are typically secured by collateral—the physical equipment financed—making them less risky than unsecured loans, all else equal. But bank regulations have failed to recognize this lower risk, and generally assign equipment loans and leases a blanket 100% “risk weight”—effectively making them more costly and less profitable for banks and discouraging banks’ participation in the market.

Should federal agencies offer loan guarantees for qualifying equipment leases and loans to incentivize financial institutions to increase available equipment financing, lower their rates, and lengthen the tenors on these products?

Why It Matters

Reindustrialization is a national imperative. A robust industrial base is fundamental to American economic strength and national competitiveness. It is also an essential element of American national defense. Without strong industry, the United States cannot produce the critical inputs and defense products needed for either national prosperity or national security. But decades of financially motivated outsourcing, anticompetitive behavior by China, and policymakers’ inattention to the industrial base have left American industry ill-equipped to meet these national needs. In 2000, the United States accounted for 25% of global industrial production, while China accounted for only 6%. By 2030, projections suggest the United States will account for just 11%, while China’s share will be 45%.¹ China today is the world’s largest producer of machine tools, producing over three times as much as the United States.² This erosion of productive capacity is mirrored in the trade data. Unable to make enough of what it consumes, the United States imports the difference, running a goods trade deficit of more than $1 trillion a year, the gap reindustrialization must close.

American reindustrialization will require substantial investment in new industrial equipment. This requirement is especially acute for next-generation industrial technology companies, which are often less able to access debt markets due to their early stage, but need equipment finance more because they rely heavily on advanced equipment. Achieving total industrial robot deployment at just half of China’s total operational stock of two million robots would require adding about 600,000 industrial robots.³ At a conservative average cost of $50,000 per robot,⁴ this would require about $30 billion in robotics equipment alone. This does not include the tens of billions of dollars in machine tools and heavy fixed equipment that will be required to equip America’s manufacturers to achieve reindustrialization. For example, to reach parity with the global average location quotient (a measure of industrial specialization) for machine tools, the United States would need to add roughly $15 billion in annual machine tool production.⁵ More broadly, McKinsey & Company estimates that ramping up domestic production to address geopolitical and supply chain risks would require between $500 billion and $2 trillion in capital expenditure.⁶

State of Play

Since 2008, business equipment loans and leases owned by non-bank finance companies have fallen from more than 2.2% of GDP to just 1.2% today,⁷ largely reflecting the decline of large non-bank lenders like GE Capital that played a significant role before the 2008 financial crisis.

Though banks remain the primary participants in this market, their role has oscillated. In 2008, banks accounted for 48% of new equipment finance volume.⁸ By 2012, this share had risen to 57% before falling back to 47% in 2015,⁹ rising to 57% in 2017, and landing at 43% in 2018.¹⁰ The overall equipment finance market stagnated from 2015 to 2020, with slightly negative growth in total financed volume.¹¹ Industry participants report that banks have pulled back in recent years. Over these years, banks shifted their focus up-market,¹² toward larger borrowers perceived as lower risk.¹³ Bank-funded equipment finance noticeably retrenched from 2023 to 2024 as a series of regional bank failures pressured deposits and interest rates crept upward.¹⁴

Post-2008 financial regulations have contributed to banks’ on-again-off-again relationship with this market. Under American financial regulators’ implementation of the Basel rules—internationally agreed banking regulations designed to promote financial stability and limit risk—industrial lending products, such as equipment loans and leases, typically receive a 100% “risk weight.” These risk weights are scores that determine how much capital banks need to hold to cover potential losses: a higher score means the loan is deemed higher risk, and therefore the bank needs more capital.¹⁵ In effect, this makes assets with higher risk weights less profitable than other products with lower ones, such as certain residential mortgages and construction loans.

This 100% risk weight is the same risk weight assigned to unsecured loans. This means that these loans backed by collateral (the value of equipment purchased with a loan) are considered, by current regulation, as risky as loans to similar borrowers without any collateral. The same weight also applies to the residual value of equipment leases (the remaining value of equipment at the end of a lease period), even though this portion is already marked to its estimated recoverable value.

As a result, equipment finance products—backed by quality collateral that is valuable and, in many cases, liquid—are not credited for their lower risk profile.¹⁶ Historically, these products have borne out this lower risk, with delinquency rates of around 2% (the share of borrowers who have missed a scheduled payment) and annualized net loss rates of around 0.5% (the value of loans deemed uncollectible and written off, net of any recovery) across cohorts, though with higher losses during periods such as the 2008 financial crisis.¹⁷

This regulatory headwind was less material during the decade immediately following the 2008 financial crisis, as banks enjoyed low interest rates and growing deposits, and as policymakers were less focused on rebuilding America’s industrial base. But in the current environment, this headwind is becoming a meaningful barrier to bank equipment finance, just as the need to finance and deploy industrial equipment has become acute. Industry participants have begun to sound the alarm about banks’ pullback from the equipment finance market as higher rates and more costly deposit bases pressure bank balance sheets. A recent industry report found that many banks “appear hesitant about their commitment to equipment finance and are reducing their exposure.”¹⁸

Analysis

Small- and medium-sized industrial borrowers face a tighter market for equipment finance from banks and a move toward private credit and independent lenders.¹⁹ Independent lenders have long had structurally higher funding costs, meaning that a shift away from banks is likely to drive up financing costs and further slow the deployment of industrial equipment.²⁰ Non-bank lenders also tend to offer loans and leases of shorter duration than banks, due in part to their higher cost of funding and to constraints on their fund lives (e.g., for private credit).

Higher rates and short tenors on equipment finance pose a problem for an American reindustrialization strategy. As interest rates rise, industrial borrowers’ monthly payments and overall financing costs mechanically increase. While higher rates can reflect underlying risk and the macro environment, in the case of equipment finance they are also driven by the shift to non-bank borrowing and by bank regulations that fail to account properly for the value of equipment collateral and residuals. Using policy tools to lower interest rates on equipment finance, without encouraging undue risk-taking, serves the goals of reindustrialization.

Short tenors are arguably an even larger problem. Many key pieces of industrial machinery have long useful lives: 15–20 years for CNC lathes,²¹ 10–15 years for construction equipment, and 15–20 years for many other machine tools, if well maintained.²² But most equipment finance now runs much shorter: private credit typically lends over 2–5 years,²³ and 7–10 years is often the upper end, even for banks.²⁴

This means the equipment’s value must be repaid over a compressed period, resulting in larger monthly payments and requiring more cash on hand. For example, a $120,000 piece of equipment financed over one year (assuming no interest) requires monthly payments of $10,000; the same equipment financed over ten years requires monthly payments of $1,000. A small but growing company can afford the latter; the former is likely out of reach.

The federal government helped solve this problem in the housing market by using agencies such as the Home Owners’ Loan Corporation, Federal Housing Administration, and the Federal National Mortgage Association (Fannie Mae) to push the market toward longer-term, 20- and 30-year mortgages.²⁵ The same logic applies to equipment finance. In housing, the government absorbed the risk of borrower default, freeing lenders to lend for decades. An equipment guarantee absorbs borrower default risk, as well as a different risk. If a borrower stops paying, aging equipment may not be worth enough to cover the loan. Once that risk is covered, lenders can match loan terms to the equipment’s useful life. The guarantee covers only the equipment’s resale value, which falls as it ages, so the government is never on the hook for more than the machine could actually be sold for.

Recommendations

The Trump administration should use existing authorities to (1) study the equipment finance market to understand financing gaps and (2) draw on that information to develop loan guarantee programs covering a portion of collateral and residual value on long-term equipment loans and leases for key classes of liquid equipment.

The Treasury and Commerce Departments should conduct a comprehensive market study. The problem is clear from the evidence above, but publicly available data on the equipment finance market is scarce, and it is needed to design policy well. The study should assess the products (rates, duration, etc.) offered by different institutions; how different institutions (banks vs. private credit) have changed their participation and exposure over time; the profiles of borrowers seeking equipment and their varying ability to access capital based on their size, stage, risk, and equipment needs; and the different types of equipment for which financing is sought, including their depreciation curves and secondary market liquidity. The Federal Reserve’s internal data may offer some insights, while other areas may require partnership with private lenders through a Request for Information.

Agencies with existing loan guarantee authorities such as the Department of War’s Office of Strategic Capital (10 U.S.C. § 149), the Department of Energy’s Office of Energy Dominance Financing (42 U.S.C. § 16512), the Export-Import Bank (12 U.S.C. § 635), and the Small Business Administration (15 U.S.C. § 636) should create loan guarantee programs that guarantee a portion of the value of the underlying equipment (e.g., collateral value for equipment loans and residual value for equipment leases). These guarantees should be issued to partner institutions—both banks and non-banks—with strong underwriting standards and prudent risk management practices, and limited to classes of equipment with sufficient liquidity. Lenders that fail to abide by these standards should be ineligible for the programs. The guarantees should also be contingent on terms long enough to match the equipment’s useful life, encouraging banks and other lenders to offer longer-term financing. These programs would correct a regulatory mismeasurement. Equipment loans and leases are secured by valuable, often liquid collateral, making them less risky than their blanket 100% risk weight implies. Converting the guaranteed portion to a 0% risk-weight federal exposure frees the bank from holding capital against it. That change would make equipment lending more profitable and draw banks back into the market. Non-bank lenders are not covered by these capital rules, but by absorbing part of the loss they would otherwise bear, the guarantee still lets them lower rates and extend tenors despite their higher funding costs and short fund lives. While directly recalibrating the weight would advance this objective, it would be a far larger undertaking. Equipment finance is currently folded into broader commercial-lending categories, so carving it out would mean a slow, contested rulemaking entangled with the international Basel framework. The guarantee approach reaches the same result now, through existing executive authority, without that fight.

Congress should create a sovereign wealth fund or other strategic investment vehicles that offer both loan guarantees and direct loans and leases for industrial equipment aligned with federal industrial policy objectives.

Further Reading