New finance business growth fared well overall in 2024, with the latest figures for the twelve months to October indicating a rise of 4% (year-on-year), according to the Finance & Leasing Association (FLA).
Commercial vehicle and business car finance rose by 8% and 5%, respectively, during that period, although clearly SMEs were more challenged, and less willing to borrow, with new asset finance lending to small- and medium-sized enterprises (SMEs) only increasing by 1%, in comparison with a rise of 8% for larger companies.
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Lenders report that the volume of new loans coming through is still up on a year ago, but as in 2024 there will be sectoral variations, with a weaker profile of lending growth to SMEs in manufacturing, transport and storage, according to Mike Conroy, director of commercial finance at UK Finance. This invariably reflects the severity of trading conditions in the sector.
It is certainly a far cry from the boom years, with the flow of finance some way off the levels existing prior to the Covid-19 pandemic, and confidence in the economy undermined by the Labour government’s economic programme and Donald Trump’s return to power, as trade tariffs, announced last week, begin to go into effect.
Conroy expects a “static trend in new lending in the near term,” adding that given the latest economic and survey data, and the announcements in Rachel Reeves’ first budget, “we may end up seeing a hiatus in business investment.”
Jason Hurwitz, European Sales Director at NetSol Technologies believes that the credit appetite of lessors, both bank and non-bank, will likely experience “visible change in 2025,” with a number of operators in the UK tightening appetite, or pausing lending as leasing returns come under pressure.
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By GlobalDataBut there are also reasons to remain optimistic.
As Conroy points out, many SMEs have probably not processed what the government’s tax changes and their economic effects mean in practice. These may be offset by government investment that will have positive spin-offs, and he doubles down on the view that the lending industry is likely to witness distinct sectoral variation.
John Phillipou, managing director of SME lending at Paragon Bank, is optimistic. SMEs, he says, continue to be resilient and seek to grow their businesses through finance. Paragon’s SME lending division enjoyed growth of 7.3% (year-on-year) in the financial year to end-September 2024. Its asset leasing volume rose substantially, by 15.4% to £330.7 million.
Meanwhile, Conroy, like others, is focusing on the twin roles for technology and sustainability in supporting SME finance this year. These are likely to be the big areas to watch, extending the trends previously established. On the one hand, is the development of artificial intelligence (AI) solutions and further streamlining of the credit application process. On the other, green finance options for energy-efficient equipment, renewable energy projects and other sustainable business practices.
Simon Goldie, director of business finance at the Finance and Leasing Association (FLA) agrees. The net-zero transition is an issue for all sectors, but it is small and micro businesses that will need the most help. “We want to see the government signalling its commitment to green finance and policy initiatives so that lenders have the confidence to further develop their green finance offering,” he says.
Economic prognosis
The economic outlook is crucial for lending. In the latest monthly compendium of independent economic forecasts from HM Treasury (released in December), the UK’s GDP is expected to grow in real terms by 1.3% this year, accelerating moderately from an estimated 0.8% in 2024. Private consumption and business investment are each expected to grow by 1.5%, consumer price inflation will be 2.5%, and the unemployment rate 4.5%.
Several key challenges are facing households and businesses, with stubborn inflation putting pressure on real disposable incomes and net margins. Most experts are anticipating further reductions in interest rates from the Bank of England, although the trajectory may not be so smooth, argues Paragon’s Phillipou, with inflationary pressures re-emerging as a result of the government’s fiscal measures, notably the rise in employers’ national insurance.
The FLA’s Goldie expects monetary policy easing to feed through into lower financing costs. Households and businesses will likely remain cautious, keeping consumer spending and business investment subdued, although according to Phillipou there should be enough certainty to give businesses a platform on which to grow.
Other issues
The economy is a major factor, but another is the regulatory environment, with one of the challenges for SMEs often accessing government support or tax relief, wherever it is available. According to Conroy of UK Finance, when considering the tax credit schemes for investment in R&D, “many businesses say they find it difficult to access these, and we have suggested to government this could be improved.”
For Conroy, the outlook very much depends on the knowledge of finance products among SMEs, especially with more funding options now available. It is therefore advice and guidance from professional advisors that remain critical to supporting business growth.
For the FLA’s Goldie, one of the main issues is the expected inclusion of leasing in the “full expensing” tax relief on qualifying capital expenditure, in view of the government agreeing with the FLA’s assessment that it must change.
In the Autumn Finance Bill, the government announced that it would remove the termination date for full expensing (it was due to end at the end of March 2026), and that it would publish in due course a consultation on draft legislation on an extension to include plant and machinery for leasing. Presently, leasing is excluded, preventing companies from claiming 100% first-year allowance tax relief (or 50% for certain categories of expenditure). However, no date was mentioned as to when the change might occur.
Goldie wants to see this rectified, invariably because access to the right finance at the right time is a key driver of growth. Supporting lending is crucial to oiling the wheels of the economy, creating the growth the government is eager for, and leasing is clearly an important element of that. “Certainty is a commodity in business,” Goldie points out, adding that, “firms want to be able to plan, and to be as efficient as possible in the choice of their investment finance, rather than using a product which does not quite fit their needs, but is included within the regime.”
The FLA is also keen to work with the government on reviews of credit data sharing and the mandatory bank referral scheme created by the Small Business Enterprise and Employment Act 2015 that was launched in 2016.
Under the scheme, large UK banks are obliged to offer small businesses, whose applications for finance leases or other types of loans are rejected, a referral to a designated online platform, with the hope that it might be able to find alternative sources of finance and address the funding gap caused by declined applications.
Many criticisms of the scheme have been aired in recent years, with small businesses requested to provide generic information and answer a list of standard questions, whereas their financing needs are more complex than that, requiring a more tailored approach. The FLA believes that if the government gets changes to these two schemes right it will improve access to the right finance for small businesses.
Paragon Bank’s Phillipou is also urging for clarity following recent legal cases affecting commission disclosures, which has led to numerous process and documentation changes across the lending sector.
Green financing
Phillipou is meanwhile extolling the virtues of the Growth Guarantee Scheme launched by the British Business Bank last year. This will enable SME lenders to provide enormous support to businesses this year. Paragon is using the scheme to support lending for green assets and overcome the challenges facing SMEs gaining finance agreements on assets such as solar panels, biomass boilers, and so on, which is clearly favourable not just for these businesses, but also for achieving the net zero targets.
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The path towards net zero is providing a role for financing “transitional assets,” says Phillipou, which are “those not totally emissions-free, but a step towards that, being funded alongside green assets.” He is keen to point out there is no one-step solution to reaching the government’s goals and it stresses the importance of businesses and lenders working together on the journey to net zero, as scale will bring the prices of new sustainable assets down to an affordable, competitive level.
There is additionally, a broadening of the green assets range, with manufacturers launching new electric, or even hydrogen machinery and vehicles. This is both “an interesting and important space and one that promises to continue to change the market that we operate in as lenders become accustomed to these assets, and as market demand shifts,” he says.
The auto financing sector is certainly braced for major changes, with an increased role for AI in fraud detection and personalised customer service, notes Jason Hurwitz, sales director Europe for NetSol Technologies that will have an impact throughout Europe, including the UK. The autonomous vehicle market is expected to grow, and used car financing is poised to expand rapidly as well as car-buying subscription models.
Hurwitz sees 2025 as the “autonomous vehicle break-out year,” with the global market expected to reach anywhere between $50 billion and $100 billion on the back of investments in technology and infrastructure. It is estimated, he says, that up to 15% of new vehicles sold in 2025 could incorporate some level of autonomous driving capabilities. The consumer interest in flexible vehicle access is also driving growth in car subscription services (variously known as “pay-per-use” and “transport-as-a-service”). These subscription models could account for up to 20% of the total asset financing market by 2025.
