Are SMEs really unaware of asset finance or are they simply not borrowing?

asset finance predators?

Predators hunting prey

Last year the website smallbusiness.co.uk, published research findings that seemed to indicate that many SMEs were unaware of the benefits of asset financing.

Its report, citing research by Close Brothers, said that “almost three-quarters (72 per cent) of SMEs in the survey did not know it was possible to secure finance against their turnover” (by which we assume they mean cash flow funding which in practise means book debt), rather than their credit rating.

It also reported that while 44% of SME respondents would consider using asset finance they were not acting on this.

It suggested that many SMEs were sticking with “inflexible and often unobtainable forms of credit” because they weren’t aware of the potential advantages of alternative funding options.

The inference, in other words, was that SMEs were continuing to approach the mainstream banks, despite the widespread perception that the banks were inflexible and unwilling to lend to them.

But how true is this?

Over the 18 months or so since there have been more pronouncements from asset finance providers.

In January this year CityAM quoted the MD of a business finance group, Peter Alderson, who said: “more are exploring financial options outside of traditional bank offerings that can support the level of business development needed to compete in new tech and online spaces.”

In the same month businessmoney.com reported on a survey of brokers operating in the asset finance carried out by United Trust Bank and revealing that 39% of them expected demand for asset finance would grow throughout 2018, identifying the most likely sectors for growth as Construction, Transport, Waste Management and Manufacturing.

Martin Nixon, head of asset finance at United Trust Bank, commented: “There’s no doubt that awareness of asset finance is growing amongst UK SMEs. Lenders, brokers and industry bodies, such as the FLA and the NACFB are working hard to spread the word about the versatility and flexibility of asset finance and how quickly and easily transactions can be completed.”

This may be true, but according to the British Chambers of Commerce (BCC) borrowing among SMEs appears to have stalled.

The BCC yesterday released the results of a study it carried out with the specialist finance provider Wesleyan Bank which found that 56% of British companies did not attempt to apply for finance in the past year. Almost two thirds (63%) of them were small firms.

The study found that those that did seek finance showed a clear preference for the “conventional” which it identified as overdrafts (18%), business loans (16%) and asset finance (9%) and that half of these reported that they did so because of weak cash flow.

The BCC’s head of economics, Suren Thiru suggested that the results revealed a move from the “credit crunch to credit apathy where a lack of demand, rather than supply of finance is now the overriding issue”.

He called for the Government to do more to kick start business investment and to relieve the burden of business costs.

But is it any wonder that two years of uncertainty and opacity about the Government’s proposals for Brexit has led to the perception among businesses that the Government neither understands or takes heed of their concerns and that SMEs are holding back on growth and investment plans?

I would argue that it is not ignorance of asset finance but cost and a fear of a loss of control of assets.

The recent memories of lenders and their insolvency practitioner advisers seizing assets as an early response to default is too recent for business owners to believe that behaviour has changed and that it won’t happen again.

We advise most of our clients to consider building their balance sheet based on slower growth rather than rapid growth based on asset-based finance. It takes one slip for the advisers and lenders with penal default clauses to see profit from misery.

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