The most recent Department of Finance SME credit demand survey (covering the period October 2014-March 2015) reported a slight increase in the percentage of small Irish businesses that had requested finance in the previous six months to 32% from 31% for the six months to September 2014.
Working capital requirements remain the main reason for applying for bank finance, while there was a further increase in the proportion of finance required by SMEs for the purchase, replacement or lease of new vehicles and equipment. This now stands at 29%, up 2% since September 2014 and 5% since the same period a year ago.
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Among those SMEs who requested bank finance in the period October 2014-March 2015, leasing and hire purchase remain one of the most popular bank finance products requested and recorded the strongest growth in terms of requests – from 23% in March 2014 to 28% in September 2014 to 32% in March 2015.
Eugene O’Donovan, CEO of SME Finance & Leasing Solutions observes that the number of providers offering lease finance in Ireland remains limited following the retreat from the market of Anglo Irish Bank, Bank of Scotland and GE Capital Woodchester in the wake of the recession.
"In addition, the main banks are offering lease finance primarily to existing customers and for amounts in excess of 10,000. Only where the customer has a good credit profile will they offer lower amounts," he says.
SME Finance & Leasing Solutions operates in the sub-15,000 segment of the lease finance market, covering all sectors including finance for second hand equipment purchased through dealers.
"We operate on the basis of referrals from dealers," explains O’Donovan. "The Irish broker referral market is very limited and underdeveloped compared to the UK. Prior to 2007/8 the finance houses had their own teams on the ground and when the recession started there was nobody in the market to offer anything to brokers."
In terms of specific sectors, he says new agricultural equipment tends to be financed through a combination of bank and vendor finance with limited options available for used equipment. "The wider equipment market is very tight due to a lack of product. Our experience is that businesses that experienced problems from 2007 to 2014 are having great difficulty sourcing equipment finance as their own banks not prepared to fund them and there are few other options."
One of the challenges of analysing the Irish equipment finance market is lack of information on market size and growth rates.
"When I was researching my business plan I was unable to obtain accurate information on the size of the market," adds O’Donovan. "However, my perception is that while the motor finance market is well served by vendors and banks, this is not the case for other sectors."
O’Donovan observes that the funding advanced through Strategic Banking Corporation of Ireland (see sidebar) has thus far been channeled through the banks rather than being used to develop new financing platforms, although he remains optimistic that support for his business will be forthcoming as it develops and proves the demand for (and viability of) its offering.
According to Niall Murphy, head of asset finance – vendor & intermediary at AIB Finance & Leasing, the equipment leasing market stabilised in 2011 and has shown moderate to strong growth over the last three years, with new business up 107% over that period.
"As the economy has recovered, new entrants targeting niche segments of the market have become a feature and subsidised finance packages have become ever more popular as manufacturers and distributors try to attract customers’ attention. We have numerous wholesale and retail partnerships (including subsidy schemes) across the new equipment/machinery market."
A critical factor in the growth of the equipment leasing market is the availability of credit and Murphy says AIB Finance & Leasing has continued to market the availability of credit. "Our offering comprises of competitive fixed and variable rate options to assist appropriate cash flow management, typically up to seven year terms where the useful life of the asset supports same and 100% finance."
A useful barometer of the performance of the agri sector is new tractor registrations, which increased 27% from 1500 in 2011 to 1900 in each of the subsequent years.
"Agriculture, whilst a cyclical business that is experiencing price volatility, is resilient, has performed well and the outlook is very positive in the medium to long term," observes Murphy. "We also expect the growth in demand for new and used plant and equipment (300% year on year over the last three years) to continue. While construction activity has increased strongly over the last 18 months, it would appear that it is still some way off peak."
Bank of Ireland Finance head of asset & commercial finance, Derek McDermott, agrees that the equipment leasing market in Ireland has picked up during 2014 and 2015 and is optimistic that this improvement will be sustained into next year.
"We have seen a significant increase in investment by businesses driven by an uplift in confidence and the return to strong growth for the Irish economy over the last 18 months," he says. "We are encouraged by excellent growth across our motor franchises and a sustained recovery in our other asset finance sectors with growth rates of between 10% and 40%."
McDermott acknowledges that hard data on how the market breaks down between bank-owned, independent and manufacturer-owned lessors is hard to come by, but reckons captives have experienced strong growth in the last few years. "We provide finance for 14 partner franchises in the motor, truck and agri markets and so consider ourselves positioned as a bank owned quasi-captive."
He says the government’s action to support the banking sector during the financial crisis ensured the continued provision of asset finance. "In terms of future developments, we are in the process of a significant IT investment aimed at making the sale and execution of asset finance faster and slicker, which means customers will find it easier to access finance in 2016."
There is still some circumspection in the market, though. While the growth trends revealed by the latest figures on the Irish economy are impressive, the recession has left a certain amount of residual caution and many businesses are still choosing to finance growth through equity and internal funds rather than asset finance.
That is the view of Colm Furlong, head of asset & invoice finance at UIster Bank, although he also notes that Ireland’s economic growth has been considerably stronger than that of the UK, US and eurozone over the past 18 months and more timely indicators suggest strong absolute and relative momentum has been sustained this year.
"Banks are a first option for many and hold the majority of the market share, but manufacturers are also a very strong force in the market," says Furlong. "With both business sentiment and the general economy growing, there is an expectation that companies will invest more in fixed assets, making asset finance even more relevant over the next five years. Investment tends to be volatile but it accelerated last year, helped by growth in both building and construction and core machinery and equipment."
Capital funding continues to be an issue for the SME sector, observes John Moran, branch manager Grenke. In its quarterly Bank Watch survey, the Irish Small and Medium Enterprises Association (ISME) reported that 45% of companies who applied for funding in the last three months were refused credit by their banks.
"This lack of available finance, coupled with increasing bank interest rates has meant more and more companies are turning to non-bank financiers in order to meet their funding needs," says Moran. "By utilising companies like Grenke, SMEs are able to access capital more easily while at the same time benefiting from the lack of capital outlay required when buying equipment that rapidly loses its value outright. In 2015 to date we have written more than 3000 contracts with an average ticket size of less than 9000, demonstrating the continued demand from small businesses for an alternative to bank financing."
When asked about his expectations for the market across 2015, he notes that GDP growth and falling unemployment means companies are now replacing rather than repairing equipment.
Cormac Costelloe, VP and general manager Dell Financial Services EMEA & APJ says his company also has a positive view of the technology equipment leasing market in Ireland.
"We are are experiencing very healthy growth and our book continues to perform very strongly," he explains. "Finding the most efficient way to deploy scarce capital resources has increasingly led to financing being considered when technology investments are being made. Industry surveys highlight that access to financing is a critical factor in as many as 85% of technology investment decisions, so it is no surprise that these decisions are increasingly are being made by CFOs who may be more motivated by efficient use of capital."
He says the appetite for financing technology in the public sector seems to have increased over the past 12-18 months and also refers to the increasing popularity of more flexible payment options that reflect the trend towards technology as a utility.
"Banks are faced with ever-increasing capital requirements, which is driving some consolidation back to core services," adds Costelloe.
"As a consequence, technology financing has seen a number of players leaving the market and many companies struggle to find a financing partner for their technology needs. One of the reasons Dell set up its own pan-European bank in Ireland two years ago was to be able to provide financing solutions for customers and fill the space left by the banks who no longer wish to operate in the space. As technology gets more sophisticated, the importance of manufacturer owned lessors has grown and it will continue to do so."
Costelloe refers to stronger growth in demand for enterprise technology solutions (servers, storage, networking) than client solutions due to the larger investment required and the longer product lifecycle and says current trends around big data, migration to the cloud and increased requirements for security of data are fuelling this growth and the ensuing requirement for financing solutions.
Dell Financial Services is growing awareness of the ability of a technology vendor to finance technology solutions and enable organisations to deploy the right technology solution now and not when budgets dictate, he concludes.
"We spend a lot of time showcasing the benefits and flexibility financing solutions bring to an organisation. Having a bank licence enables us to offer the broadest range of financing solutions, for example software financing and commercial loans. Dell Financial Services offers these solutions directly to its customers and via channel partners and distributors."
