Why is asset financing now so popular?

Posted on 5 Sep 2013 by Tim Brown

The latest findings from market research group BDRC's SME Finance Monitor were encouraging on several fronts, says Neil Lloyd of Lombard.

Neil Lloyd, Head of Sales and Development, Lombard Business Commercial
Neil Lloyd, Head of Sales and Development, Lombard Business Commercial

An increased proportion (44%) of SMEs reported growth in the past 12-months, and when it comes to the next 12 months more than half (51%) expect to see positive growth.

Significantly, given that previous surveys have suggested that the economic climate is a major barrier to growth, less than a third (28%) indicated that they believe that this is a factor today – the lowest level seen since the SME Monitor began.

But perhaps the most encouraging finding was the increase in SMEs using external finance (44% compared with 39% in 2012), with leasing and hire purchase leading the way over traditional finance products.

I believe that there are three factors driving the increase in usage of these products:

1.  As funding products leasing and hire purchase are more widely available.  The reduction in the availability of core products, such as overdraft or loans, has made SMEs look for other ways to fund themselves. Leasing and hire purchase is readily available from over 5000 equipment dealers, 400 brokers or direct from finance companies.

2.  In the case of leasing and hire purchase, the funding security will be wholly or largely in the asset being purchased. In the past many of these purchases would have been funded using a traditional banking product and security would have been taken on something such as property. However SMEs realise that by using these forms of funding they can increase the availability of their working capital, something that many recognise as fundamental to business success as the economy starts to grow again.

3.  They provide financial certainty for the loan period since, providing the repayments are met, leasing and hire purchase facilities cannot be recalled during the duration of the agreement.

“Just 28% indicated that they believe economic climate is a major barrier to growth today – the lowest level seen since the SME Monitor began.”

Furthermore the increase in leasing and hire purchase usage is supported the Finance & Leasing Association (FLA). For the 3 months to June 2013 FLA members provided funding of nearly £6bn, an increase of 15% compared to the same period for 2012. This funding was across a range of business purchases including plant and machinery, vehicles, business equipment and IT.

This is supported further by the FLA’s Asset Finance Confidence Survey which showed that 91% of respondents expected the value of asset finance to SMEs to increase over the next 3 months.

In summary, leasing and hire purchase are increasingly becoming the funding products of choice for those SMEs looking to grow their business. The reasons are clear and supported by numbers reported through theFLA, both in quantum and their own survey findings.

However the challenge for the asset finance industry is to increase usage further so that more SMEs can benefit which will in turn support further growth for the UK economy as a whole.