Average deal size on the rise as corporates switch to leasing.
Many large lessors are still struggling to source investments in SMEs, as smaller companies continue to delay capital investments and key sectors such as construction remain under pressure, a Leasing Life investigation has revealed.
Several bank-owned lessors report that their deal sizes have increased over recent months, as demand from SMEs remains comparatively low.
One large UK-based leasing company reported that its average deal size had doubled over the past year to reach £200,000 (€246,414).
This rise in deal size is also explained by the switch to leasing by some large corporates as their access to funding via traditional lending routes, such as bank loans and capital markets, remains restricted.
Bank-owned lessors and smaller leasing companies alike, however, remain firmly and publicly committed to investing in the SME market.
Several well-known lessors have even invested in new software systems that will enable them to process large numbers of smaller ticket deals. However, these companies do not expect to see a large influx of flow deals until after the banking crisis is over.
Lessors’ commitment to smaller businesses is in line with European governments’ own action plans for recovery in the SME sector.
Last month’s UK Budget, while infamous for its emphasis on austerity and scaling-back of government investment, still included aid packages for Britain’s ailing SMEs.
The main highlight was the cut in small business corporation tax, paid by those making profits of less than £300,000 a year. The rate will fall to 20% in April next year, from its current level of 21%.
This tax break took place in the wake of a government-backed commitment by semi-nationalised banks to invest in the SME sector. Royal Bank of Scotland alone is committed to investing £3bn in smaller companies over the next two years.
Leasing companies attributed the shortage of demand from SMEs in part to the continued weak state of certain sectors.
One senior leasing industry figure who did not wish to be identified said: “Smaller customers we were dealing with three years ago have not approached us for some time, even though we have kept in regular contact. These companies are deferring investment decisions until they see some more green shoots.”
Some sectors struggling
Unlike IT and health care leasing, which have seen solid growth in terms of leasing volumes as companies seek to avoid carrying unnecessary burdens on their balance sheets, plant leasing has suffered badly as priorities change and construction projects are shelved.
For example, a source at a major UK lessor said the company in question had not seen any business in heavy plant leasing for as much as 12 months.
And leasing of smaller items of machinery such as forklift trucks has suffered equally, according to John Bradshaw, sales manager at UK-based Bibby Leasing, who said that in 2009, the forklift market was down 41%, and the first quarter of 2010 saw the least active period in memory.
The sales figures, taken from a report by the British Industrial Truck Association (BITA), are in line with trends witnessed in the leasing industry, Bradshaw added.
While this shortage of demand in certain sectors is apparent across Europe, it appears to be most acute in parts of Central and Eastern Europe.
According to Krzysztof Bielecki, managing director of ING Lease Holding and a specialist in leasing in Central and Eastern Europe, leasing markets in Eastern Europe remain under pressure with continued low demand from SMEs.
The Polish market, meanwhile, recovered during the second quarter but left production levels “far below what they were in 2007”, he added.
He painted a similarly difficult picture of the leasing markets in Hungary and Romania, which are suffering from low demand for both large and small ticket equipment leasing.
Not all leasing companies are struggling to lend to small businesses, however. Many with business models committed to signing large volumes of small deals continue to find the SME sector a lucrative source of new business. In the main, such leasing companies source the bulk of their SME business from brokers.
This suggests that SMEs are willing to make smaller capital investments, while at the same time delaying larger investments until after the banking crisis lifts.
Chris Stamper, head of ING Lease UK, said that lending by his company to SMEs has increased by 15% over the last year.
Also, Close Asset Finance subsidiary, Close Business Finance (CBF), reported being pleased with new business levels to SMEs – its core customers – so far this year.
Through its 25 broker sources of business, it expects to sign about £20m of new business in 2010, according to Richard Briscoe, CBF’s managing director. Last month CBF, which was founded in November last year, signed about £2m of new business.