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May 1, 2008updated 12 Apr 2017 4:48pm

Special Report on leasing to SMEs: Wise Deposits

They account for 47.1 per cent of UK employment (10.5m jobs) and 37.2 per cent of corporate turnover (£967.2bn).

By Brian Rogerson

In the first of a series of reports in this issue on leasing to SMEs, Brian Rogerson discovers the UK market is rich in opportunities

Small and medium-sized enterprises are the lifeblood of the European economy, not least the UK’s. They account for 47.1 per cent of UK employment (10.5m jobs) and 37.2 per cent of corporate turnover (£967.2bn).

However, in some respects they are the least understood of all business sectors due to their diversity and distribution across the UK.

According to BT Business’s recent State of the Small Business Nation report, SMEs are likely to seek initial start-up advice from the internet, ahead of private organisations (such as lawyers, accountants and suppliers) and business organisations (such as British Chambers of Commerce, Federation of Small Businesses and Institute of Directors). (see chart 1)

Importance of the internet

This is particularly true of start-ups in Northern Ireland (92 per cent) and the South East of England (88 per cent). Private organisations were the second port of call in most regions, except in the South West of England where some 80 per cent appeal to family and friends, and in Wales where 71 per cent go to business organisations for advice.

In general the biggest barriers to SME growth are finance, tax and VAT, according to 58 per cent of BT Business’ respondents. This is followed by the cost of running the business (54 per cent) and finding the time to plan for expansion (43 per cent). (See chart 2).

Use of finance

The most recent study into SME funding by Warwick Business School found that 80 per cent of businesses had used one or more external sources of finance over the last three years. Furthermore, it revealed that the use of external finance increases with the number of employees and turnover.

The study found that:

  • 53 per cent of SMEs (two million businesses) use an overdraft
  •  A similar number use personal or business credit cards (55 per cent)
  •  Around 24 per cent (900,000 businesses) use term loans
  •  Some 27 per cent use leasing and/or hire purchase. 
  •  Total monthly repayments on leasing/hire purchase agreements are estimated at £2bn
  •  Some 3 per cent (100,000 businesses) use invoice finance 
  •  The same number (3 per cent) use equity finance. This is estimated at £14.3bn over the    last three years

SME use of leasing and HP

Warwick Business School researchers sought the type of finance used by SMEs. They found that:


  •  About one in three use only leasing
  • Three in five SMEs used hire purchase only
  •  Less than 10 per cent use both leasing and hire purchase
  •  The incidence of using both forms of asset finance increases with firm size. 
  •  Almost 25 per cent of medium-sized firms (50 to 249 employees), using asset finance, use both forms of finance product

Regarding the amount of finance used:

  •  The average monthly repayment on leasing and/or hire purchase is just over £3,000
  •  This represents total monthly repayments of £2bn
  • Ethnic minority-owned businesses make significantly lower monthly payments than white-owned businesses (£708 versus £3,123.) This result is robust when controlling for other business characteristics

Looking at the purpose of asset finance:

  • Some 72 per cent of SMEs use it to pay for vehicles
  •  11 per cent use it to pay for computer equipment
  •  9 per cent of SME businesses use it to pay for machinery.

The researchers added that around 1.5 per cent of asset finance users failed to make at least one re-payment in the last year.

SME use of other asset-based finance 

  •  More than 50 per cent of SMEs use invoice discounting
  •  Around two in five use factoring
  • Some 5 per cent use stocking finance
  •  Large numbers of businesses “don’t know” the type of asset-based finance being used

Looking specifically at invoice finance the average amount advanced each month is estimated to be £146,000. The estimated total advanced is just under £8bn. The principal purposes for SMEs using invoice finance were given as to fund working capital (66 per cent) and to fund business expansion and acquisition (25 per cent).

SME use of equity finance

The study estimates that the average equity investment in the last three years is just under £135,000. The total from all equity investors over the last three years is just over £14bn. However, there is a large degree of uncertainty in these estimates reflecting the relatively small sample size of equity users.

Regarding the types of investor used (among SMEs with equity investments):

  • Directors are the most popular source, accounting for 25 per cent of equity investments
  •  Around 10 per cent of these businesses have received funds from existing shareholders or friends
  •  Some one in 50 obtained funds from a venture capitalist


Looking for reasons that SMEs used equity supplied by friends, family or directors, as opposed to other sources, the study found:

  • Some 20 per cent of these business owners cited the following reasons: “to maintain control of the business” or “no need for another source”
  • Less than one in 20 of SMEs cited supply-side constraints (“Unable to raise equity from other sources”)


SMEs often don’t understand leasing

One anomaly of SMEs is the high percentage that prefer to outright purchase their assets rather than finance them. This often comes at the expense of making inroads into banking credit lines.

In the company car sector, for example, over 40 per cent of SMEs still prefer to cash-buy their vehicles than lease them. Despite leasing companies targeting SMEs with varying degrees of success, there remains a distinct preference for them to outright purchase their assets, be they lathes, vehicles, office furniture or computers.

One lessor believes that lack of product innovation is a big factor in SMEs preferring to own their assets. He said: “The options available to them are not particularly attractive, despite the cash-flow benefits and (reducing) balance-sheet attractions of leasing. The only real innovation in asset leasing in living memory has been in the extension of leasing agreements to slightly longer terms.”

Graham Hill, chief executive of GHA Finance, believes that the “grave lack of product innovation” is the main reason that SMEs prefer to buy their assets rather than use finance.

He said: “SMEs require above all flexibility for their assets. They do not understand leasing and it is rarely explained to them. They are very wary of penalties if they need to settle a lease prematurely, and they can’t understand why a leasing company will not accept a part-exchange asset.”

Hill stressed that unexpected “wear and tear” end-of-agreement penalties and excess mileage charges on company cars often put paid to any goodwill many SMEs may have felt towards lessors.

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