TOO many small businesses see their expansion plans quashed by a lack of finance. Their bank doesn’t have the confidence to lend them the money they need, so business owners end up trying to fund their companies’ growth on overdrafts and credit cards, storing up trouble for when the next downturn comes or not proceeding with the investment at all.
There is another option they could consider – if they knew about it. Asset finance may not be sexy, but it has been used by businesses acquiring assets for hundreds of years and is a rapidly growing part of the financial services landscape. What is it?
In very simple terms, asset finance involves a lender giving a company a loan secured against a piece of machinery, equipment, vehicle – any asset used for business purposes. The benefits are also simple. Instead of having to pay cash up-front for the equipment they need, small business owners can fund their investment over several years. In other words, it allows a company to pay for an asset with the income it generates.
Asset finance also gives a business security and confidence. Even if it suffers temporary cash flow problems, the situation will not be made worse by the loan being withdrawn providing repayments are maintained. The recession saw many perfectly good businesses go under because their overdrafts were either reduced or withdrawn – an asset finance arrangement would have provided diversification of funding sources.
The asset finance industry has grown solidly since the financial crisis, with new business volumes rising by 21.4 per cent since 2009 to reach £25.4bn in 2014. It’s particularly useful for smaller companies – it services the S in SME. Part of the issue is that banks often don’t want to do deals under about £200,000, due to a combination of higher perceived risk and costs to serve. However, asset-backed finance is less risky for the lender compared to unsecured facilities. As the security afforded by the underlying asset is often essential to the business’s operations, both the propensity to default and the loss on any default is therefore lower. As a consequence, firms are likely to find they can access funding more readily in the asset finance market than from conventional bank borrowing.
Given the longer-term nature of asset finance facilities (typically between 3 and 10 years), it can also be useful if you want to refinance existing debts. Vehicle leasing, meanwhile, is an attractive option for companies that operate vans or cars as part of their business. It enables them to spread the cost of the funding and maintenance, helping them to more accurately forecast their cashflow.
For a variety of reasons, small businesses will often access asset finance through an intermediary such as a broker. The broker will work in conjunction with the manufacturer or supplier of the equipment, and identify the most suitable funder from their panel to provide the loan at the point of sale. It is not appropriate for every type of company. In very high tech industries, for example, where the market is fast-moving and the risk of equipment quickly becoming obsolete is high, companies should look for a bespoke arrangement that enables them to refresh their assets more frequently.
The fact that challenger banks are entering this market shows its increasing potential. My biggest beef is education – we don’t teach our children personal or business finance, so they are not aware of the options they have. If every small company in the UK had the confidence to seek the finance they need to create just one job, we could solve our unemployment problem in a matter of years.
Mike Francis is head of asset finance at Investec.