As the financial crisis recedes into distant memory, asset finance is proving more popular than ever with many companies, particularly as a solution for SME finance for the Small and Medium-sized Enterprises (SMEs) who account for almost half of all UK asset finance.
While many SMEs were reluctant to invest in the immediate aftermath of the credit crunch in 2008, and for a number of years afterwards, many are now finding that the time is ripe to re-invest in plant and machinery and other necessary equipment.
And many SMEs are again turning to asset finance at pre-credit crunch levels to invest in a wide range of assets. The flexible form of funding offered by asset finance means it is easily accessible and helps underpin the ability of companies, especially SMEs, to grow their business.
SME finance accounts for half of the UK market
Figures from the Finance and Leasing Association (FLA) reveal the second consecutive year of double-digit growth, with new business increasing by 12% in 2015 compared to 2014, show there have now been 24 months of consecutive growth in the provision of asset finance. This is a seven year high.
According to the FLA, asset finance loans originating in the UK totalled over £29 billion last year, with SME financing making up approximately half of the total UK asset finance market.
About 80% of the market relates to hard assets, such as vehicles and plant and machinery, while most of the remainder consists of soft assets such as telephony, IT and printing equipment.
Why do SMEs prefer asset finance?
For many businesses, particularly small businesses, bank lending carries a number of restrictions that they are not inclined to consider, including banking covenants that can be very prescriptive.
At the same time, many high street banks feel it is simply not economic to lend sums of less than £50,000 on a stand-alone basis.
As a result, many SMEs have turned to alternative forms of business finance, such as asset finance, to fund their business assets – which has brought them a number of benefits.
These include spreading the cost of buying equipment over a number of years, thus preserving working capital and helping cash flow with fixed periodic payments. This in turn, allows SMEs to make investments back into their businesses for future growth.
This type of business finance also allows SME investment in vital assets that they might not be able to afford otherwise.
It also provides greater flexibility than other types of secured lending, such as business loans, since there is the option to hire assets for a specific period — to fulfil a fixed term contract, for instance — rather than requiring the outright purchase of the asset.
Growth in business confidence
As business confidence increases and SMEs begin to consider investment delayed during the economic downturn, there is growing demand for asset finance.
This increased demand is great news for the wider economy and the market appears to be in a good place to meet it, with more providers than at any point since the economic downturn and a wider range of options available.
When it comes to the types of finance that businesses prefer, most funding methods have seen overall growth this year.
For example, hire purchase increased in 2015 by 14% to £15.1 billion compared with 2014, while operating leasing grew by 11% to £6.7 billion and finance lease increased by 5% to £3.7 billion
Talk to your finance provider
Investment decisions often start with the finance provider, and many SMEs are increasingly seeking independent, rather than bank-provided, means of finance. This may be because independent providers offer more attractive rates of interest or less onerous terms than some of the traditional bank-based finance lines.
Maxxia is one of a number of independent finance providers that can provide solutions to many SME finance needs, thanks to a long pedigree in the asset finance arena. These can include finance options for a whole series of asset classes.
It’s important to discuss the solution that best suits your business needs before making that final investment decision. This may be to optimise cash flow, take advantage of short term windfalls or spread repayments over the longest possible period.
Finding the best solution
SMEs should always talk to their finance provider to discuss the most suitable finance arrangement from the funding methods available. And the provider should have the experience and expertise to adopt a consultative approach which quickly identifies the key needs of the business.
Once these objectives have been clearly identified, the asset finance provider should be able to offer the type of asset finance that will help the business do what it needs to do.
Choosing the right provider should provide an SME with access to asset finance solutions suitable for a huge array of equipment across a wide array of sectors.
And having that degree of experience and flexibility working for you is truly an asset in its own right, and can help make the right investment decisions for your business.
If you would like more details on how our approach, you can read more about our asset finance solutions.