While the UK economy continues its slow recovery, having so far narrowly avoided a triple-dip recession, the country’s leasing market appears to be performing ahead of the curve, writes Peter Johnstone.
With cash-strapped businesses now in serious need of new or updated equipment, and banks still seemingly unwilling to lend, asset finance in the UK is being re-evaluated as a cheap and reliable means of funding capital expenditure.
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"Despite what everybody else thinks," says Wesley Harfield, head of sales at Investec, "SME Britain’s credit has remained pretty robust all the way through the recession, and as we’ve moved out of recession."
Harfield notes that while the broker-led sector has been shrinking, overall UK asset finance business has increased.
George Ashworth, managing director of Aldermore Asset Finance, says the same thing.
He believes that ING Lease both created and sustained a large part of the broker market and that a number of funders are as yet ill-equipped to handle demand on the same basis.
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By GlobalDataThe sudden departure of ING Lease from the UK has played a part, he says, in terms of removing both funding and brokers from the arena, but the downturn in broker business "is primarily a function of low confidence in the UK economy and business investment potential," while the overall asset finance market is doing "very well indeed."
Ashworth points out that asset finance currently accounts for "circa 29%" of gross fixed-capital formation (excluding property), with some sectors "at historic highs".
"When you look at asset finance in the context of the overall economy it must be the case that other investment is doing pretty poorly. This demonstrates to me that finance is a very strong product with a long-term future."
Less bank lending
One reason asset finance appears to be faring relatively well is a dearth of lending from high street banks, especially to the SME sector.
Christian Roelofs, director of leasing and consumer finance at Grant Thornton UK, says banking since the crisis has "returned to a relationship-based model".
"The bottom line is that in some cases this puts the pressure on leasing as a core product in a bank’s service offering because the majority of the leasing subsidiaries’ capital is being provided to people other than the banks’ customers," he says.
"However, there are positives for the industry from the crisis. With pressure remaining on traditional bank lending, the market has remained open for a growth in leasing as a suitable, and often more appropriate, alternative."
Harfield supports this, saying: "High street banks, certainly in the SME sector, can’t afford to have a special relationship because the costs are too high, so they chuck loads of people into call centres – the S end of SME especially – [where you talk to] somebody who can hopefully put you in contact with someone who can help you."
He adds that the broker model of asset finance allows for an approach similar to relationship-based banking, but without the costs. "It’s not feasible in reality for an SME to have a relationship with 20 different lenders", but the broker community "enables customers to get to a wider audience of funders".
Julian Rose, head of asset finance at the Finance & Leasing Association (FLA), says that even if banks are lending, they are engaging more in asset finance rather than traditional lending.
He says: "The large banks are now doing a lot more to make sure that their SME customers get the best product to suit their needs. If the need is for equipment finance the banks are being far more active in suggesting to them that they look at an asset finance option rather than a conventional bank loan."
Ian Isaac, interim managing director of Lombard, agrees that "the recent banking crisis has made it easy" for asset finance, and "you can see how the FLA penetration has grown strongly".
But he is cautious, as "when bank markets open up again and liquidity opens up again, we need to make sure we don’t go backwards and get steamrolled by loan financing at silly prices".
The biggest challenge in that instance, says Isaac, is "how the industry makes sure its products are really relevant and really beneficial to customers". They should be asking "’why wouldn’t I lease this asset, why wouldn’t I use asset finance for this asset instead of buying it?’" he says.
He gives PCP in the car market as an example of a business model to follow, where he states car finance is at 60-70% penetration, with 80-90% being PCP. "It shows", he says, a proposition that is "flexible and represents good value for money", while giving dealers and manufacturers "conversation with customers about renewing and replacing."
The FLA’s Rose says asset finance is "becoming more of a service proposition" with "plenty of reasons" for lessees to stick with asset finance, "even if cash does become more available."
"The key one," he believes, "is our ability to help and to manage their assets. Indeed quite a few finance companies are now going into businesses, and suggesting that they can take over their whole equipment portfolio, and manage it more effectively for them than doing it in-house."
Roelofs also sees service provision as increasingly important, looking again to the motor finance industry which has moved "over the last 15 years" from "being a commoditised finance business" to a point where "if you talked to a contract hire company today and called them a finance company they’d say ‘no, I’m a service company’."
He describes the "more sustainable model" as being a "business where you as a leasing or finance company sit between the customer and a number of individual service providers".
He says: "Under this approach you could use your buying power to raise cheaper capital and procure assets and services providing significant value to the customer.
"Part of that service might be an asset, part might be a maintenance package, part might be procurement, and part might be finance. [The specifics are] less relevant; you’re the one sitting in the middle. That’s the way that hire look at it. They provide a solution to the customer rather than an asset, or cash."
While many think that service provision is a way of highlighting what asset finance has to offer, Aldermore’s Ashworth says vendor leasing "in particular" has "a strong part to play."
"I think increasingly it’s the case that manufacturers are not just looking to sell a product, but they’re looking to increase the bandwidth of their proposition," he says.
They can do this by wrapping a number of value-added services around the products that they make, he says.
"Asset finance in the form of leasing is the most wonderful contractual glue to make this a reality. Indeed there’s nothing better than a lease contract that acts as contractual glue," he adds, as it allows the manufacturer to provide a bundle of products and services together.
The main challenges for leasing remains business confidence, with SMEs still unwilling to invest in an uncertain economy, and the visibility of leasing itself.
Ashworth sees an "overall lack of confidence in terms of investment decisions", leading "people to defer investment decisions"
He says: "The nature of investment taking place today is driven more by the need for replacement capacity rather than the building of new incremental capacity.
"We need to get through this stage of the cycle. The economy needs investment and export-led growth; it doesn’t need a return to growth based on consumer and government spending."
But some sectors are doing well, with IT leasing at a four year high. "That’s driven by a lot of companies making investment decisions in their IT estate," says Ashworth, "decisions that they have deferred until now. They’re looking to technology to capture and embed efficiency gains."
Mike Francis, head of asset finance at Investec, also sees IT and communications increasing. He believes this is because "people just held off and held off" with investment decisions they now have to make.
Grant Thornton’s Roelofs says there’s still hangover from the recession, in terms of confidence: "If people aren’t confident enough to invest in new assets or upgrades, that’ll be a bit of a dampener on where the industry can go."
But again, things seem to be improving, and over the past six months companies "are getting to the end of the ‘do-nothing’ stage" and "getting more confident; they’re going for that growth," he says.
Francis says that, as confidence starts to return, there is a risk that companies will start competing with each other for custom.
Especially after the departure of ING, he says "it’s very difficult to know if the industry has cannibalised itself or whether it’s actually increased the pie, to get more businesses interested in asset finance."
Companies should be focusing on growing "the pie", leading to more business for everyone. "It’s all very well telling the industry that," he adds, "but the industry should know it." Instead, there needs to be more focus on promoting leasing, and marketing it as a trusted and economical alternative to other forms of finance.
Lombard’s Isaac also thinks penetration is a challenge. He says: "While the market appears mature, the penetration of asset finance into business investment still offers a huge amounts of opportunity, even if you take the FLA statistics of around 25-30% funded by its members which I think maybe overplays the reality of it.
"When you think there is over £100bn (117.3bn) of investment in equipment and non-property assets each year in the UK, I think there is still masses to go for and asset finance is finding it hard to penetrate well."
Ashworth says: "For as many years as I’ve been involved in this industry, I cannot recall asset finance going through that figure, the 30% market share of investment. I’m not quite sure why that is; I would love the industry to increase our penetration of overall investment."
Rose, however remains positive. He says it is "natural for businesses to be turning to leasing in these times."
He says "awareness levels of leasing are higher than they’ve been for very many years," while the credit crisis means businesses "want to keep the cash that they have and not overstretch themselves. When it comes to equipment investment, more and more are looking to lease rather than purchase".
It had been proposed that access to the government’s Funding for Lending Scheme (FLS) would help lessors attract new business, in particular SMEs that had previously not considered asset finance as a viable option.
However, says Investec’s Harfield, the FLS "hasn’t really opened up access to lending." Instead, "it’s just regurgitated the prices. The same people are borrowing, but they’re borrowing at 1% less"
Isaac says that while he is "really pleased" at the inclusion of asset finance in the FLS as "recognition of the lobbying of FLA and the power of asset finance", he is also worried because "the play is all on price, [which] in itself it is not a stimulator of new demand."
Roelofs describes the scheme as "shifting deckchairs" and less effective than most would have wanted, with the issue being "lack of appetite for SME credit risk" rather than lack of liquidity. While traditional lenders are "crowding out the primer end of the market, we need to move them down," he says.
What the FLS does is provide "capital at a cheaper price," rather than providing "capital into a wider range of industry participants".
The effect of the FLS on pricing seems to be a concern for many. Isaac says it could be an issue for the industry if prices are driven lower in the overall market rather than a stimulant of new demand introduced.
Ashworth says another factor affecting prices could be the appearance of finance providers joining or returning to the broker sector following the withdrawal of ING, leading to a more price-sensitive marketplace.
That withdrawal seems, now the dust has settled, to have left many players in the market largely unperturbed. Ashworth says: "I believe a number of brokers have exited the market, and there is consolidation taking place within the broker channel", while Francis reports a spike in business and a larger number of brokers with which Investec is building relationships.
Roelofs says that while it "caused quite a sensation when it happened", companies have picked up the slack, soaking up business and employees.
Looking ahead, as Francis points out, the economy is "not going anywhere fast".
While the spectre of the International Accounting Standards Board’s lease accounting standard looms on the horizon, Ashworth hopes the standard, if it’s implemented in its current form, doesn’t mean leasing is "regarded by those lessees that have big leasing estates as overly bureaucratic and cumbersome to administer."
Rose says the FLA is "concerned" that the proposals are too complicated, with "about 120 things you have to go through if you want to account for one lease." But he remains "optimistic" that "by the time the final standard is published it will be improved."
Otherwise, he says, "there’s nothing out there that’s an imminent threat to the industry". Roelofs believes the industry should look to move away from "its reliance on traditional banking for funding."
"Looking at it from the other perspective, the capital markets today are the cheapest sources of funds, and unfortunately the leasing industry, other than bank owned lessors, don’t have access."
Otherwise, he says, it’s "more of the same."
"We’re in an economic environment where there’s concern for medium-, maybe long-, but not short-term change. Unless we are active in seeking change and promoting growth, everyone’s just going to get by, unless there’s another shock to the system".
As Ashworth says, it’s now "steady as she goes". Currently, "the challenge for all of us is to increase the penetration of asset finance from its current model of 29% to break through that glass ceiling of 30%."
Or, in the words of Roelofs, "what we’re in now is pretty much business as usual".
