Encouraging statistics show increased capital expenditure through asset finance may well be under way says Carl D’Ammassa
The UK economy is in a much healthier state than this time a year ago, of that there can be no doubt.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Figures released in January by the Office of National Statistics show the economy grew by 1.9 per cent in 2013, the biggest annual rise since 2007.
Optimism among UK SMEs has continued into 2014 too, with recent Aldermore research, conducted with the Centre for Economics and Business Research, showing it is now at its highest level for a decade.
There has been a well-documented drop in lending to SMEs since the start of the recession in 2008. Small businesses in the UK have been forced to hold back from investing in new capital equipment due to the cash flow limitations being experienced.
The danger here is twofold: first, ageing assets require high capital expenditure to replace, causing particular difficulty when funding access is limited; and second, output dwindles with ageing assets, as fulfilling orders can be problematic with assets that simply cannot provide the required output.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataHowever, the renewed sense of optimism among UK SMEs means this trend of under-investment since the financial crisis could soon change.
With the economic landscape turning a corner, SMEs should be actively investing to improve their businesses now in order to grasp the expected growth opportunities in the coming years.To make this a reality, SMEs in this country will still be reliant on external funding.
A recent report found 80% of brokers expect demand for asset finance to increase over the next three years, meaning there’s a real opportunity for providers to increase market share in the funding space.
The first signs of this trend were spotted last year. Although the UK’s asset finance industry declined by 1% year-on-year to November 2013 (according to Finance & Leasing Association statistics), the actual percentage of capital investment made through asset finance stood at 29% in September 2013, up four percentage points on the year.
The signs point to a shift in opinion among SMEs regarding asset finance, yet complacency must not creep in.
Providers need to be proactive in raising awareness further to highlight asset finance as a credible alternative finance solution.
The fact remains that our customer base is comprised of SMEs and not large corporations.
Many of them will not have the in-depth knowledge of finance that larger companies are able to call upon. For our industry to play its part in the economic recovery, we need to ensure small businesses acquire a better knowledge of the options available to them.
Caution required
While growth must be encouraged and welcomed it is important that SMEs take a cautious approach.
Just last year there was widespread talk of a ‘triple-dip’ recession and the UK economy remains 1.3% below its 2008 peak. Other major economies hit by the recession, such as the US and Germany, have long since surpassed their pre-crisis peaks.
As funders, we have a duty to our customer base to ensure a sensible approach. SMEs need to be aware of all the finance options available to them, but we must be astute in providing capital.
SMEs starved of funding for the past few years might want access to as much as possible, but the desire to over-borrow must be managed.
SMEs should be wary of over-promising and under-delivering. If this were to happen, they could be plunged back into financial difficulties if contracts are unable to be fulfilled.
After all, it’s worth remembering it was risky lending and borrowing that caused the financial crisis in the first place.
Credibility is what our industry is striving to achieve.
Allowing small businesses access to too much capital could have disastrous consequences for the reputation of asset finance as a whole. Sustainable growth should be the core criteria of all our lending strategies.
The Government is keen to deliver increased competition in banking and current work to break-up the state-owned banks attest to this.
The Government should, however, also do more to highlight what alternative funding options are already in the marketplace and can provide SMEs with increased choice.Recent attempts have been made to stimulate capital investment.
Annual investment allowances have been increased from £25,000 to £250,000 on capital assets where the cost is incurred before the end of 2014, and removing the housing portion of the Funding for Lending Scheme should mean funds switch to SME lending.
I am confident this month’s Budget will further demonstrate the Government’s commitment to supporting small businesses.
In 2014, Aldermore’s asset finance team plans to lend more than £750m to UK SMEs. We recorded 87% year-on-year growth for the first two quarters of 2013 and I want to see this bettered this year, particularly if the Government shows the support for SMEs we expect.
2014 could prove to be a great year for the asset finance industry.
Carl D’Ammassa is managing director of asset finance at Aldermore Bank
