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Asset Finance: The Lending Revolution

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Date: Fri 12/Sep/2014, 00:00

The current business environment within the construction sector in the UK is definitely on an upward spiral. According to a buoyant PMI survey, activity in the construction industry rose strongly from 62.4 in July to 64.0 in August, signalling the largest monthly rise in building activity since January and one of the largest ever seen in the survey’s 17-year history. This upturn was led by yet another nearrecord increase in house building, but commercial activity and civil engineering also rose at historically strong rates, reflecting a broad-based recovery fuelled by a mixture of rising residential property demand as well as increased business spending on office space, industrial capacity and retail outlets.

So, why the title to this article? The answer is that despite these positive trends, a bank-funded study has revealed that success rates on applications for bank loans were at a three-year low. In corroboration the latest Business Monitor quarterly report confirmed that small businesses are more likely to be turned down for bank funding than they were in the aftermath of the financial crisis. In contrast, the National Association of Commercial Finance Brokers (NACFB), of which SKM Asset Finance Ltd is a long standing member, has published the results of its annual broker survey, which shows this year’s asset finance lending total stood at £12.7bn, which is almost double the amount that NACFB lenders facilitated during the depth of the financial crisis in 2009. It represents a continuation of the 16% year-on-year growth they reported twelve months ago and marks a 20% increase in lending to UK small businesses over the last year via its independent broker members – the largest increase in business completed by NACFB brokers in one year since pre-recession times. There are now a wide range of SME lenders operating in the UK, and the market is diversifying at an incredible rate. Availability of funds is no longer the issue, but there are still significant barriers facing SMEs who are looking for finance. Small businesses don’t have to rely on their high street bank for credit, but few are aware of the full range of alternatives out there – or that an independent broker will be able to match them with the best lender for their needs.

In the latest Close Brothers Business Barometer, a poll of UK SME owners and senior management on a range of economic and financial issues, revealed that 41% of businesses admit that their knowledge of alternative sources of finance could be better, while 18% say that they are unaware of any alternatives to bank lending. They also found that 44% of respondents had never heard of asset finance, much less understand the benefits it could bring to their business.

For those of you who want a brief explanation of what asset finance is, it is the provision of hire purchase or leasing facilities which enable an SME to acquire vehicles, machinery and other assets whereby security is taken on the asset concerned. The SME will pay over an agreed period, not being longer than the useful life of the asset.

It is advisable for any business to hold cash reserves against potential dips in activity or income but this doesn’t have to delay or prevent investment in vital assets. Asset finance enables a business to purchase the equipment they require while protecting their working capital, spreading the cost of investment and helping reduce their tax bill.

Asset finance also opens up additional credit lines that are independent from a bank and is less likely to require additional security compared with a bank loan. A bank may call in an overdraft at any time, but with asset finance an SME is protected by the security of a fixed term contract.

So how do SMEs become more aware of asset finance? One potential game changer is the recently announced Small Business, Enterprise and Employment Bill which builds on a Treasury consultation launched earlier this year. It proposes taking legislative action to help match SMEs rejected for funding from their bank with alternative finance providers. Overall, the creation of a mandatory process to help match SMEs seeking finance with a wider range of lenders will be hugely beneficial for small businesses and the UK economy. However, alternative lenders shouldn’t just be viewed as a last resort for SMEs who have already been rejected by the banks. The fact the government recognises a need for change in small business lending is a positive step forward.

Banks have enjoyed a monopoly on small business lending without keeping on top of what today’s SMEs need and want. The reality is that hard working small businesses need fast and flexible finance, and banks are simply not built to provide this sort of funding. As an asset finance broker, SKM Asset Finance Ltd can be both fast and flexible and we currently provide finance decisions within 48 hours, many in less than 12 hours, and have a 98% approval rate on all asset finance proposals we receive.

In summary, we hope that finance companies, brokers and organisations such as the NACFB continue to spread the word of the importance and availability of asset finance for SMEs.

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