For UK independent lessors, selling finance to SMEs is a
profitable business, and one that could get even better in the wake
of recent tax changes
Though it may have started in the consumer finance sector, the
credit crunch could have many implications for business asset
finance. It presents challenges, but also opportunities, for the
finance industry. Neil Lamond, commercial director of the Wyse
Leasing brokerage, is among those who look on the bright side.
“While volumes for us have remained relatively static over the past
year, we feel the current credit squeeze could present a positive
opportunity,” he says.
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He adds that as small business customers will be “exploring all
avenues” when looking for additional finance, including asset
finance, which he regards “as a flexible solution with potentially
less ‘red tape’ than certain other offerings”.
Also, unlike bank overdrafts, “the credit we arrange cannot be
‘called in’ on the whim of a branch business banking manager”.
In addition, his business, like many others in the leasing
trade, also offers factoring and invoice discounting services.
A gap in the marketplace
So is this viewpoint widely held? Do lessors have an opportunity
to turn the credit crunch on its head, and use it for their own
benefits, particularly in the form of selling finance to SMEs?
Judging by industry comments given for this piece, this certainly
seems to be the case.
Philip White, CEO of the IT lessor, Syscap, makes a similar
comment to Lamond’s. “The complete lack of consumer confidence in
banking and borrowing witnessed over the past few weeks is bound to
have a knock-on effect within the business community,” he
remarks.
“This will be especially true for SMEs which can feel very
vulnerable during times of general economic unease. In looking at
the options for IT investment, they need to find resellers and
finance partners who can help meet their economic priorities
– maintaining cashflow, achieving demonstrable returns on
investment, and paying over time in affordable amounts which are
not subject to arbitrary change.”
In many sectors of industry and commerce there is as yet no
indication of any imminent economic slowdown, but asset finance is
a well established option for some types of plant and equipment,
and its attraction is growing.
The engineering sector
Andy Curran, director of the machine tool finance specialist
FFI, comments: “In our sector demand is currently very buoyant.
SMEs in the engineering trades, many of them sub-contractors to
large manufacturers in industries like aerospace and oil
production, remain busy.”
Others agree that in capital intensive trades such as
engineering and printing, SMEs are increasingly being drawn towards
asset finance. Andrew Bullard, sales director of State Securities,
says: “Bank lenders have been walking away from these sectors over
the past 10 years.
“They prefer just to provide the basic banking facility rather
than becoming major funders of their customers’ fixed assets. At
the same time the customers do not have the cash resources for
outright purchase of all their machinery.”
The refinancing of machinery already in use by the customer is a
major part of State’s asset finance business. “We have funded a
large number of management buyouts and buy-ins through refinancing
deals, many of them rescue situations where the company was bought
out of administration,” says Bullard.
Small Firms Loan Guarantee Scheme
He adds that asset finance can fit well into the Small Firms
Loan Guarantee Scheme, which is operated by the Department of
Business Enterprise and Regulatory Reform (DBERR) and guarantees 75
per cent of eligible loan exposures to start-up and early stage
businesses.
“Banks seem to have become more reluctant recently to lend under
this government guarantee since the requirement for official
approval of each individual loan application was removed two years
ago,” says Bullard. “Yet we still find it a very good scheme to
leverage asset finance into the SME sector.”
Hire purchase
In many sectors of SME asset finance, hire purchase (HP)
accounts for more business than pure leasing.
“Most of our deals are on HP terms. Customers prefer the
prospect of taking ownership at the end of the deal,” Bullard adds.
Paul Sheady, sales director of Liberty Leasing, points out that HP
can give rise to legal complications in refinancing business, but
that in most cases these can be overcome. “In England and Wales
sale-and-HP-back requires the execution of chattels mortgages, but
this can be done where the customer is a company rather than a
partnership or sole trader,” he remarks.
Tax benefits for SMEs
Conventional leasing into SMEs, with the lessor claiming capital
allowances (CAs), has long been disadvantaged by the tax system.
However, SMEs themselves can claim CAs at enhanced rates which are
unavailable to lessors on leased assets. This factor will, if
anything, be intensified in April 2008 when the existing fiscal
incentives for plant investment by SMEs move on to a new basis.
Under the annual investment allowance (AIA) all CA claimants will
be entitled to 100 per cent first year allowances on the first
£50,000 worth of annual capital expenditure on plant.
However, since the middle of last year leasing companies have
been able to opt into long funding lease treatment in which lessees
claim CAs under leases, as with the HP situation. This is an
attractive option for lessors, or individual companies within
lessor groups, in the case of portfolios where the customers are
largely SMEs, but where non-tax factors – such as supplier
preferences in point-of-sale business – still favour leasing over
HP.
ICT
In the IT sector, White suggests that leasing products have
plenty of scope for growth given a relatively low starting point of
penetration. “An FLA study in 2005 discovered that ICT was the
asset type most often not acquired by SMEs because of lack of
finance. Indeed, the survey showed that asset finance was used in
only 5.9 percent of hardware acquisitions and 4.6 percent of
software,” he says.
White is nevertheless optimistic about the ability of finance
companies to work with IT suppliers on innovative products. He
remarks: “Emerging pricing models such as utility, applications
service provision (ASP) or ‘pay as you go’ are available from
increasing numbers of resellers. Most of these will offer a finance
or leasing solution which delivers the same benefits.
“The market opportunities that exist for selling to SMEs no
longer relate to just low or mid-range technologies. The gradual
commoditisation of ICT over the past few years means that more
traditionally high-end solutions have become affordable for smaller
companies – but flexible payment options are essential,” he
adds.
Importance of the SME market
Almost all UK lessors, including the major banking groups, have
at least some of their customer base in the SME sector. Outside the
big groups, a number of relatively small players occupy niches in
the market with predominantly SME customers. Liberty Leasing, for
example, has a finance portfolio divided roughly equally between
prestige cars for customers’ private use and business asset
finance, all introduced by brokers.
There are many business models, but they add up to a strong
asset finance industry for the small customer.
Some of the funders
State Securities plc
(part of Five Arrows Leasing Group)
Six valuers and 25 sales executives, dealing with new and used
machinery for customers in capital intensive sectors such as
engineering and printing.
Approximate value of asset finance book: £120m.
Sales director: Andrew Bullard
Finance for Industry (FFI)
Specialised in
machine tools
Director: Andy Curran
Syscap
Sales aid finance for IT equipment
135 employees throughout UK and Europe
Currently in strong growth phase, with annual new business values
above £130m
Chief executive officer: Philip White
Clydesdale Bank
(part of National Australia Bank group)
Over 50 asset finance specialists throughout the UK, mainly focused
on SME customers and introduced through a mixture of direct
and third party channels
Head of asset finance: Ian Barr
Henry Howard Finance
Lessor and broker for sales aid finance with equipment dealers.
Deal sizes normally range from £4,000 to £100,000 (average =
£10,800). £35m worth of business funded in year to April 2007
Director: Mark Crook,
Liberty Leasing
Financing of new and used
commercial vehicles, printing machinery and other industrial plant.
Deal sizes range from £10,000 to over £250,000. Annual value of new
business around £10m.
Sales director: Paul Sheady,
