While brokers continue to benefit from increased competition for asset finance business, there is a realisation that wider economic uncertainty will increase the pressure from customers for flexible lease solutions. With its post-EU future still not fully clear, Paul Golden looks at the state of play in the UK.
Recent data for asset-based finance in the UK suggests an industry in rude health.
In 2016, the industry recorded its sixth consecutive year of growth, with annual new business surpassing £30bn for the first time since 2008.
Figures released by the FLA showed that asset finance new business – primarily leasing and hire purchase – grew in May by 16% compared with the same month in 2016. The plant and machinery finance and business equipment finance sectors reported increases in new business of 28% and 31% respectively, with new finance for commercial vehicles up by 3% over the same period.
This trend was repeated across the first five months of the year, during which time asset finance new business grew by 9%, with the strongest growth again in plant and machinery and business equipment finance – up by 19% and 12% respectively.
The British Vehicle Rental and Leasing Association’s (BVRLA) most recent annual membership and fleet size report shows a net gain of 128 members across all sectors last year, with the greatest increase in the leasing broker sector.
Growth in the total member fleet continued with a 5% rise to 4.71m vehicles, with the number of cars on fleet rising by 5.4% and the number of LCVs up by 3.9%. The biggest percentage rise came in the HGV sector, which increased by 6.1%.
A large part of this fleet expansion came from the personal leasing sector, which grew by 13% to account for 1.6m vehicles. The corporate leasing fleet grew by 2% to just over 2.6m vehicles.
According to Mathew Walters, head of consultancy and data services at LeasePlan UK, the rapid growth of the private lease market is one of the most important automotive trends of 2016.
“Previously representing just a tiny proportion of the European car market, private leasing is now growing by around 10% annually,” he says.
LeasePlan research has revealed that nearly one-third of SME business decision makers believe their business setup is not favourable to leasing, and yet a similar percentage feel overwhelmed by vehicle management administration.
In March, Asset Based Finance Association (ABFA) noted that asset-based finance to businesses rose by 13% last year to an all-time high of £22.2bn and that asset-based finance was increasingly taking market share from bank overdrafts as a key source of funding for SMEs.
ONS data for the first three months of the year shows investment growth in the UK economy of 1%, so asset finance is clearly performing well in volume terms observes John Bennett, CEO of JB Associates and ex-chair of Leaseurope.
“The latest Bank of England agents’ summary of business conditions throughout the UK indicates that overall business investment intentions remain positive, although Brexit uncertainties are continuing to impact some longer-term investment projects,” he says.
ABFA also pointed out that at least some of the growth in lease activity could be attributed to financial instability following the Brexit vote, with businesses turning to asset-based finance to create a “cash cushion”.
In addition to Brexit, Simon Lefevre, managing director of ABN Amro Lease, says the industry faces the not inconsiderable task of coping with ongoing regulatory and compliance changes, and maintaining margins at sustainable levels while growing business volumes.
He describes growth in the number of new lessors injecting more liquidity into the market and continued consolidation of the broker environment as key developments, while Simon Goldie, head of asset finance at the Finance & Leasing Association (FLA), also refers to continued growth in the broker-funder model.
Demand is generally strong, with the usual month-to-month variations between broker-introduced and supplier-introduced business according to 1pm CEO Ian Smith, who agrees that supply-side competition has increased with more funders vying for the same business.
Manufacturers are also more proactive – in plant and equipment, for example – with increased levels of vendor programmes, adds Maxxia Group CEO Roger Skinner.
“The challenge is to ensure the transaction is the right one for the customer,” he says. “There has been a lot of regulation from the Financial Conduct Authority (FCA) as well as self-regulation within the industry, while technology has driven the transaction process with more new developments such as e-signatures being used and lenders have had to pay more attention to KYC – or ‘know your customer’.”
While the funding of hard assets remains fairly constant, he refers to growth in the funding of soft assets such as IT and green energy. “More companies are using IT and have a need to keep updating it on a regular basis,” Skinner notes.
“Two other areas that stand out are construction and transport and logistics, with good confidence levels amongst customers, while we have also noticed in one of our businesses a trend in rural areas for farming communities to convert to green energy. We have provided increased levels of funding for assets such as biomass boilers.”
Asset finance customers expect a swift response, and they also want a less onerous solution than going down the traditional bank finance route, which might include a charge over business assets as part of the bank’s security requirements for lending. They also expect the funder/broker to handle every aspect of the funding process and provide the level of service delivery that they have become accustomed to in other service industries.
That is the view of Skinner, who says customers also expect some element of advice from their funder/broker about the right products or solutions for them.
“They want quick underwriting decisions, a paperless workflow and a swift payout process,” he explains.
“There is also increasing acceptance of the multi-layered broker model.”
While accepting that competition in the asset finance market has driven down rates as lenders compete with each other for business, Carol Roberts, managing director at Bibby Leasing, says that in doing so, many funders have lost sight of what matters most for businesses.
“They want deals that offer flexibility, enabling them to access their funding as and when they need it,” she explains.
“SMEs need to be adaptable to cope with changing market conditions, and their funding line should be able to adapt with them. Financers should not just have a ‘fund and done’ philosophy; they should be supporting their clients along the way.”
Manufacturing and construction sectors typically have the most appetite for funding due to the nature of their businesses, in that they need to purchase machinery and materials – often in large quantities – in order to be able to carry out their work.
In terms of the assets financed, the Bibby Financial Services Q2 2017 SME Tracker showed that just over one-fifth (21%) of SMEs plan to invest in IT over the next three months, while 19% plan to invest in machinery or equipment.
“We therefore expect some businesses to look to asset finance in order to fund that investment,” adds Roberts, who says businesses value those who take the time to understand their business and its needs, providing guidance and advice to help them achieve the best possible outcomes.
“Strong performance also ultimately benefits the funder with repeat custom and customer recommendations, so it should also be in their interests to work closely alongside the business.”
Growth in asset finance is reasonably broadly based, and though it has been driven by the vehicle leasing and fleet finance sectors since the end of the financial crisis with growth in equipment finance relatively stagnant, this appears to be changing with growth in car and commercial vehicle finance slowing while equipment finance is picking up, says Invigors partner Richard Ryan.
“For example, lending on construction, agricultural, mechanical handling equipment and production machinery has increased by 8% year-on-year, while business equipment lending is growing by 18%,” he continues.
“The broker channel has also seen a strong return to growth. It was hit hard by the financial crisis as funding dried up, but business is now growing at a healthy 15% per annum.”
In addition to greater access to funding for smaller players – enabling these players to take market share from the larger funders in the broker SME market – Bennett says it is significant that following years of relatively low levels of defaults, the last few months have seen an increase in arrears levels for some SME funders. “This may signal the beginning of the return to ‘long-term normal’ default levels,” he suggests.
Business users are expecting to transact their asset finance online in the same way as they manage their personal finances, adds Ryan. “Particularly in the small-ticket market, customers expect to manage their accounts through self-service portals and access their account details using mobile apps. Manufacturers and dealers with vendor finance partners expect these partners to tightly integrate their finance proposition with dealer and customer portals.”
Demand for more sophisticated solutions has risen, particularly among businesses acquiring technology, agrees Giles Turner, head of western Europe at Société Générale Equipment Finance (SGEF). “One of the challenges facing the UK asset finance market is adapting to the changing behaviour of customers caused through advances in technology and the desire to acquire equipment in different ways, for example pay as you go.
“Moreover, vendors are thinking carefully about how they structure their solutions at the point of sale, giving the finance industry more opportunity to help and add value.”
He suggests that there appear to be good prospects for growth in most sectors – although the renewables sector has taken longer to develop than expected – and highlights the opportunity to work with vendors and intermediaries to provide better solutions for their customers, especially as customers move from an acquisition mentality to a usage approach. This opportunity can be combined with the use of technology to improve convenience and speed.
Looking ahead to the remainder of 2017 and into 2018, Smith says the key challenge will be out-thinking the potential dual negative effect of both reducing origination and slower collections in a post-Brexit economic downturn.
Goldie warns of continued indications that SMEs cannot always find the finance they require. “A lot of information is in the public domain, but the next challenge is for SMEs to be able to find it,” he notes.
“This is why we have been calling for the government to create a comprehensive and impartial online directory of finance providers, which could be managed by the British Business Bank and would act as a one-stop shop for business finance.”
According to Bennett, funders will be stretched to maintain margins and return on capital with an increased supply of capital that is targeting the asset finance market – a challenge that will be compounded if demand also reduces due to a weaker economy with lower investment levels.
Generating more non-interest income will become a priority, for example through facility and administration charges, document fees and insurance income, he says.
“The industry will also face regulatory challenges on two fronts. Firstly, the impact of the FCA’s review of the business finance market could result in greater regulation being applied to asset finance. Secondly, the industry must adapt to the FCA’s changing priorities as it moves from ‘authorisation’ mode to ‘review/compliance’ mode for brokers and intermediaries.”
Skinner agrees that increased regulation from the FCA is almost inevitable, and adds that since increased competition from banks in the asset finance market has led to a decline in margins as these institutions have been prepared to buy deals at largely uncompetitive rates, retaining profitability will be a challenge going forward.
“Given the high number of funders currently in the marketplace, we may well see more consolidation,” he says.
However, Skinner offers a more upbeat assessment of the potential impact of Brexit, suggesting that if the economy slows down as a result of the UK’s withdrawal from the EU, businesses that have traditionally not used asset finance to finance their assets may have a change in mindset and turn to this means of funding their businesses.