Cash Flow and Asset Finance
Our appreciation for cash flow management at FinCred is no secret, and for good reason; according to a study by Quickbooks, the majority of Small to Medium Sized Enterprises (SMEs) have encountered problems with their cash flow, with 1 in 7 left unable to pay employees and over 1 in 3 unable to pay their debts. It is because of this very tangible problem that services in the asset finance, or asset-based finance, market become very popular over the last 10 years, reaching a record in 2019 with £140bn being provided by the Finance and Leasing Association (FLA) members alone. At the time, the notion of a viral epidemic would have seemed preposterous, but fast forward two years and 2021 has painted a very different picture of the market, leaving many curious how the second half of 2021 will unfold for the industry. This article will summarise the most recent statistics for each sector in the market, explain their discrepancies, and predict how consumer behaviour might shift as we come to the end of 2021.
Asset Finance & Entering the Pandemic
As the UK marched through the 2010s, asset-based finance became only more relevant; many companies were unable to capitalise on opportunities and purchase the correct products, not because they didn’t have the money in absolute terms, but because their cash flow environment could not permit it. In 2015, the FLA reported that almost 32% of all UK investment in machinery used asset financing, primarily through leasing and hire purchases. Since operating lease agreements can permit much shorter contracts and hire purchasing can cover most of or the entire lifespan of the product, there are financing options available for any kind of enterprise. Furthermore, in most cases (apart from with operating leases), the asset will still show up on the lessee’s balance sheet, and accounting and taxation will recognise the lessee as the owner of the product. Since asset financing frees up capital, offers cash flow flexibility, and can be done very quickly, it reached peak popularity as we approached the end of the 2010s – in 2010 the market was worth under £20bn, and by 2019 it hit £35.7bn.
When the infamous COVID-19 virus instigated a global lockdown, factory output slammed at a record pace when staffers were placed into the furlough scheme. The effects of the pandemic have been felt in every crevice of the economy, and asset financing was no exception; in July 2020 the FLA released statistics showing a 60% drop year-on-year (YOY) in new business. Commercial vehicle financing dropped 62%, business new car financing by 87% YOY. With no demand to purchase new products or to replace them while not in use, business equipment and plant machinery financing dropped between 40% and 44%. For relatively understandable reasons, the IT equipment finance sector shrunk only 4% in May 2020 – with no-one in the offices, the only infrastructure keeping us working was technical. These were savage numbers for the market and, unfortunately, there was little anyone could do about it. There was still some activity, however, with FLA members still providing £16bn of new finance to SMEs, had over 2m in outstanding contracts, and had funded 34.3% of all UK investment in machinery, equipment, and software. As a leading trade body for various finance sectors, these statistics can be understood as a litmus test of the market at large.
As the UK’s economy went through apprehensive lockdowns through the second half of 2020, suffering the worst of the ‘pingdemic’ and subsequent labour shortages, its corporate climate was on edge. However, as vaccination rollouts continued and staffers were encouraged to return to work, optimism became more commonplace and the numbers started to return. Director of research and chief economist at the FLA Geraldine Kilkelly confirmed that the industry saw its first month of growth in over a year in February 2021, with the market growing 1% YOY (mainly through leasing and hire purchasing). Plant and machinery financing also showed signs of revival, with business rising 14%; commercial vehicle operations also rose 8%. Interestingly, though, IT equipment, while resilient over 2020, showed signs of slowing, having contracted 20% in February YOY. Consumer new car financing declined 27% and used car financing by 25% YOY, revealing that while the UK was recovering from the pandemic, it was only doing so one sector at a time.
Boons and Rebounds for the Asset Finance Market
Things continued to get better for the market leading into May; the UK asset finance market grew by 106% YOY in May 2021, according to the FLA, and the first half of 2021 had 26% more new business operations YOY. Plant and machinery once again rose by 58% in growth for May YOY, indicating the success of business-as-usual industrial operations and the revival of factories. Commercial vehicles finally came through, reaching 126% of new business levels in May 2021 compared to May 2020. IT equipment financing, however, reported new business levels 29% lower than May 2020. Consumer financing for new cars reached a staggering 514% of new business in May YOY, and for used cars the number stood at 270%. Kilkelly forecasted expectations that the sudden surge in business will likely placate over the coming months, and she was right; just one month later, the market dropped to a positive 39% of YOY levels in growth. Plant and machinery financing had new business up 47% YOY for June 2021; still impressive, but also still lower than the 58% recorded in May. Commercial vehicle financing also had a 47% increase on YOY levels, and IT equipment financing reliably fell to 32% of YOY levels. Kilkelly confirmed that while growth rates were certainly moderating, this shows clear grounds for optimism for the industry.
The most recent statistics for July 2021 offer a more realistic terrain for the market; having gone through the teething pains of recalibration, the asset finance market saw a growth of 3% in terms of new business YOY and, spanning the first 7 months of the year, the market grew 24% higher compared to the same period in 2020. Plant and machinery financing reported new business up 10% in July YOY, and business equipment made a comeback with new business rising 47% YOY. IT equipment financing continued to fall, reaching a drop of 51%. Kilkelly acknowledged that growth had slowed overall in June, but also stated that asset sectors and business channels are continuing to have strong recoveries. This is true: broker and vendor finance services have effectively reached pre-pandemic levels, and the demand for agriculture and construction equipment jumped 24% in July. However, more support would be extremely helpful: Kilkelly chimed the bell pressuring the Government to extend its super-deduction allowance in order to better incentivise FLA members to invest in clean and efficient assets.
Patterns and Predictions
In the asset finance market, there are some important trends to note in spanning the last 12 months. One notable anomaly comes from the investments in IT equipment; during the height of the pandemic it performed well compared to other sectors, having shrunk only 4% in May 2020 YOY. That said, as the other sectors started to boon as economies reopened, IT investment lagged behind, having continually contracted to 51% in July 2021 YOY. This is likely because the equipment is becoming less of a necessity as more and more of the work force is being mobilised to return to offices and factories. From an investment standpoint, this does not necessarily mean that it is an imprudent venture; here at FinCred we have advised SMEs to proactively embrace improved technological services as we shift to a more digital economy. Furthermore, YOY metrics compare investment to when IT was at its zenith in 2020. Nevertheless, it remains important to recognise that technology is not currently as imperative as it was during lockdowns. One other factor to consider when looking at these statistics is that, as we had recently reported at FinCred, the concurrent global shortage of silicon chips is stymying a plethora of sectors. For auto financing, such a situation is encouraging; as consumers move away from new cars, the consumer used car market hit its best ever Q2 result. Figures from SMMT show that the used car market grew 108.6% over the quarter, up 6.6% when compared to pre-pandemic levels. This suggests a very positive upcoming demand for consumer used car financing – if you are involved in the sector, keep your eyes peeled for opportunities.
In conclusion, the asset finance market, like many others, has suffered a perturbed 2020, resulting in salient losses and historical drops in business. However, as the market entered 2021, asset financing embraced more activity, albeit at different rates. Investments in IT equipment perpetually dropped, while demand for agricultural and construction equipment increased. Plant and machinery financing saw steady growth from February until the most recent statistics from the FLA, suggesting that factory-based operations are thriving and will continue to lest another lockdown occurs. Furthermore, the silicon chip shortage has shifted demand for consumer new car financing into the used car market; businesses involved should prepare sufficiently. While sectors have been recovering at differing rates, one thing is for sure – the market is set to return strong.