With banks still reticent to lend, asset financing offers a viable and reliable alternative source of funding as businesses prepare for a return to growth, says Maxxia’s CEO, Roger Skinner.
Business confidence is returning to both the UK and global economies, with many firms expected to invest more this year in anticipation of a return to growth. Yet bank lending to businesses is subdued against a backdrop of increased capital requirements and a risk-averse outlook.
The Bank of England reported that net lending to SMEs tumbled by £900 million in July, despite cheaper finance being made available to banks by government initiatives, such as the Funding for Lending Scheme (FLS). According to industry data, almost one in five businesses that applied for bank credit in the past six months had its application refused. As a result, almost half of the companies surveyed applied for an alternative, non-bank form of funding.
Asset financing is one of these alternatives witnessing tremendous growth. Up to July 2013, asset financing had grown for four consecutive months and in July alone, provided a total of £1.9bn in funding to British businesses, according to the Finance and Leasing Association (FLA). It has also been identified by the Department for Business Innovation and Skills as the finance option of choice for the nation’s growing businesses.
Lessons from the past
However, asset financing has suffered from a less than spotless reputation in the past. So is it really a sustainable and practical alternative to conventional approaches? With important lessons learned from the not-too-distant past, there are some simple steps businesses can take to avoid the common pitfalls previously associated with asset financing: ensure transparency up-front; pay close attention to the small print; and keep a keen eye on assets and liabilities throughout the duration of the agreement.
The devil is in the detail
Homework at the start of a contract can save heartache at the end. There is no one-size-fits-all solution and, as is so often the case, the devil is in the detail. Businesses must therefore look beyond monthly fees, determine exactly what happens when primary leases come to an end, and think about the tools and support available to manage assets while they own or use them. Businesses should also remember that they can change without warning, so a flexible approach is also very valuable.
Banks are still critical
The statistics show that smart businesses have recognised the potential in asset financing and are financing a variety of assets in a cost effective and transparent manner to support expansion and growth. However, it is important to recognise that many asset financing companies remain dependent on banks to provide them with access to funds. The issue with initiatives such as the FLS is that because the banking sector remains risk averse and continues to be very selective, the scheme itself may simply reduce the cost of borrowing or increase the margin for the lender, with no widening of access or increase in supply. It is only with the support of the banks that the asset finance community can provide access to the vital infrastructure businesses need in order to survive and thrive.