The Government’s extension of the Funding for Lending Scheme to asset based lenders, invoice finance houses and leasing firms was met with cynicism from the business community. Many have been quick to comment that the initiative is “no game changer” and that it will do nothing to increase demand for credit, which apparently remains low.
The Funding for Lending Scheme, launched in July 2012, intends to increase lending to UK households and businesses by incentivising banks and building societies through low cost access to funding.
Whilst considered a success in the mortgage market, there has been widespread criticism of the scheme amid concerns that, despite falling costs of banking funding, lending to businesses has continued to decline. So does this announcement mark yet another George-driven disappointment?
Asset finance companies will still be dependent on banks to provide them with access to funds via the Funding for Lending Scheme.
This poses two problems. Banks and bank owned asset finance companies will remain risk averse and continue to finance only the top quality credit. This means that the extension will simply reduce the market cost of borrowing or increase the margin for these lenders. The level of liquidity and credit available to SMEs will not improve.
On the other hand, independent asset finance firms are unlikely to benefit from the extension unless the banks recognise the role they play in reaching SMEs. Funding needs to be provided to the independent sector on competitive terms comparable with the subsidised rates currently enjoyed by the banks.
Some form of check and balance is required to ensure the scheme does what it is supposed to. If the playing field is leveled, there’s a fighting chance it could work. The inclusion of asset financing provides significant benefits. Asset finance companies are better suited to serve and understand the needs of SMEs. High street banks have long lost touch with their SME clients and are finding they just don’t have the time, and in some cases the inclination, to know their customers anymore.
It’s the asset finance firms that can provide access to the vital infrastructure SMEs need in order to survive and thrive. And, contrary to popular belief, assets can be financed in a cost effective, transparent manner.
So if the banks meet the Chancellor’s promise and provide more funding to the asset financing community, SMEs need to know how to take advantage of it. In many respects, SMEs are in control of their own destiny in terms of avoiding the asset financing horror stories of the past. Homework at the start can save heartache at the end: leasing isn’t a one size fits all solution and each business should work with asset finance professionals to determine exactly how it applies to their business. As is so often the case, the devil is in the detail.
Businesses need to look beyond monthly fees, determine what happens when primary leases come to an end and think about the tools and support available to manage assets while they own them. Being locked into inflexible, cumbersome contracts is not the way to go. Businesses change without warning, so an agreement that can adapt to changing circumstances is crucial.
The best providers will tell businesses all of this. If they don’t, businesses should run, keep running and not look back.
But what of the concern that demand for credit just isn’t there – that SMEs are much more focused on paying down debt rather than investing in growth for the future? Data from the asset financing community shows this simply isn’t true. Statistics from the Finance and Leasing Association indicate that in 2012, while bank lending fell, asset financing grew by 5%.
The future of funding in the business community does remain largely in the hands of the established financial institutions. But the Chancellor has thrown the banks a lifeline that enables them to put the power back in the hands of the experts. Asset financing firms and SMEs must now work together to mobilise the banks to ensure the extension of the Funding for Lending scheme delivers meaningful change rather than simply another failed bid to boost borrowing.