Finance boom time despite the slump

For many businesses hit by a cash-flow crisis in recent years, commercial finance has been the difference between survival and going under. As a result, the commercial finance industry has recorded strong growth, even at the recession’s peak, writes Jason Hesse


Britain’s thirst for commercial finance products continues unabated, led by invoice discounting and asset-based lending.

The perception that banks are unwilling to lend has fuelled an increase in demand, says Peter Ewen, managing director of ABN Amro Commercial Finance. “The banks have been singled out as villains in recent years and this damaged trust has caused businesses to explore other options,” he says. And as bank lending falls, commercial finance rises.

Invoice finance and asset-based lending allow firms to inject working capital without having to take out a loan.

With invoice discounting, a business can effectively sell its invoices to a lender. In return for a fee, the business receives instant cash. As cash is received from customers, it is paid to the lender, reducing the outstanding balance.

“Invoice discounting is the part of the market that is growing fastest, especially when you compare it to overdrafts, where volumes were effectively flat or declining last year,” says Ian Larkin, managing director of Lloyds TSB Commercial Finance. At Lloyds, invoice discounting volumes rose by 7 per cent last year.

Industry leaders report overall strong demand and the potential for growth is significant

Asset finance has also become popular as it allows companies to acquire equipment without making a large upfront capital outlay. “Businesses understand that financing assets gives them more sustainable funding lines than purchasing the assets outright and helps to preserve their cash flow,” says Mr Ewen.

Companies are also drawn to asset finance thanks to lenders’ acceptance rates. Because the finance is linked to an asset – such as plant, machinery or office equipment – lenders know that, should a business default on its repayments, they could recoup their losses through the financed asset. Asset finance is also more tax and capital efficient.

According to lenders, demand for asset-based lending and invoice discounting is strongest from larger firms.

Lloyds, which with a 23 per cent market share of the commercial finance industry is one of the biggest players, has seen large firms’ appetite for invoice discounting grow since the credit crunch hit Britain in 2008.

This is partly due to larger firms having “savvy” finance directors who are aware of sophisticated financial products, but also because firms are increasingly looking to protect their liquidity and cash flow.

Though they represent just 6 per cent of Lloyds’ customer base, large firms account for 30 per cent of the lender’s total invoice discounting volumes and this proportion is growing, says Mr Larkin.

Paul Hollick, sales director at Alphabet, Britain’s third-largest car fleet funder, says the trend is also due to lenders’ gradual withdrawal from the small and medium enterprise (SME) market. Lenders are much happier to lend to large firms with strong balance sheets than to smaller, riskier SMEs.

He says: “Everybody is happy to lend to bluechips – the IBMs and Glaxos of the world – but for the smaller sole-trader, it has become a challenge. Since the credit crunch, we’ve seen several big players exit the SME market altogether.

“The industry will never return to the ‘good old days’ – expect to see further market consolidation and exits.”

That’s not to say that the market is all doom and gloom, either. Industry leaders report overall strong demand and the potential for growth is significant.

Currently, only 42,000 businesses, or just under 1 per cent of Britain’s 4.5 million private companies, use invoice finance. Yet research from Lloyds shows that cash is tied up in 10 per cent of all businesses; that’s 408,000 extra firms that could potentially benefit from invoice finance and lenders are keen to get a slice of the pie.

What is holding the industry back? All three industry leaders point to the inherent restrictions of commercial finance products.

“Financing receivables is only appropriate for a certain section of the commercial world – the business-to-business market, where products and services are sold on credit,” says Mr Ewen.

Lloyds’ Mr Larkin adds that the industry “hasn’t done itself any favours” either, for example by giving different names to the same products. “It’s over-complicated and there’s a stigma attached to products. They’re assumed to be expensive and hard to access,” he says.

Research supports this. Though customer advocacy is high at Lloyds – 85 per cent of customers have a positive attitude to financing – the challenge is converting new prospects.

However, leading lenders are confident that good business lies ahead. Mr Ewan concludes: “Across the board, British businesses are learning the benefits of using commercial finance to control their cash flow and to grow.”

ANALYSIS

Euro-finance

The industry may be well established in Britain, but how does UK commercial finance compare to the rest of Europe?

As in Britain, commercial finance in Europe is largely driven by asset-based lending. Last year saw European asset-based lending grow by 7.3 per cent to a total value of new business worth €222 billion (£184.6 billion). Leasing of equipment and vehicles showed particularly strong growth last year, up 8.4 per cent and 11.7 per cent respectively.

Yet, while 2011 was considered a vintage year for European asset finance, the UK was not the best performing country. Germany, France and Austria all showed growth across all categories, while the UK and the Nordic countries recorded a decline in new equipment leasing.

“British businesses are too hung up on ownership and do not necessarily see asset finance as a first choice for procuring equipment,” says Fred Crawley, editor of Leasing Life, Europe’s journal for the asset and commercial finance industry.

Britain remains the third-biggest consumer of asset finance, however, with UK lessors funding €34.9 billion of business, right behind France (€36.4 billion) and Germany (€43.8 billion), according to asset finance industry trade body Leaseurope.