Could capital finance be the key to the economic recovery?
Alexander Baldock, MD of Lombard, tells Bytestart readers why capital finance, and the role asset finance has to play in it, could be the key to the enterprise-led economic recovery.
Economic recovery is underway, fragile and uncertain though it may be. What is certain is that SMEs – the heartbeat of the British economy – are indispensable to sustaining this recovery. It is also certain that renewed business investment by SMEs is crucial. Investment in capital assets stalled during the downturn but it is now picking up, and must continue to pick up, for SMEs to be competitive. Capital investment – particularly asset finance – is the lifeblood that will sustain the recovery.
Why asset finance? Because leasing, hire purchase and structured debt provide additional, flexible sources of finance, offering more control over cash flow and preserving working capital. Asset finance can also reduce the total cost of using an asset. But if it is to play the driving role in powering the UK’s recovery through SME investment, the asset finance industry needs to do a better job of making these benefits understood.
We must explain how asset finance works for all sorts of capital investment. Most small companies will be familiar with asset finance for cars and vans, but some may choose to fund technology or machinery with an outright, upfront cash purchase, without realising the impact this may have on their company’s financial stability. Without this cash in the bank, is the company prepared to face an unexpected change in market conditions, or depreciation in the asset value? Will it always have the financial reserves to cope, whatever the economic weather?
We must convert those SMEs who believe that committing to a financing solution involves becoming ‘locked in’ to a long term debt owed on an asset that will depreciate in value, quickly leaving the business with a greater debt owed on the asset than it is worth. The reality is that different forms of financing will suit different types of assets. A good provider will ensure that the client benefits from a deal structured around their needs.
Some manufacturers, meanwhile, might view longer life assets such as plant and machinery as better suited to upfront ownership. They reason that these assets are more durable, and hold their value for longer. But paying cash upfront has its risks, for instance in dynamic sectors where manufacturing technology develops rapidly or unpredictably. With asset finance, the manufacturer can future-proof its investment as well as preserve cash, by gaining the flexibility to update the production line as and when the latest technology is released.
This flexibility is at the core of asset finance. The customer can tailor the facility to match a specific contract or business depreciation policy. The range of facilities available not only allows for individual cash flow requirements, but can also enable the financier to take the risk of the resale value. This flexibility allows businesses to do more with less, to expand into new markets, to recruit and develop more valued staff.
But asset finance is not just about powering growth. It’s about unlocking cash too. Sale and leaseback can help companies release capital tied up in a business asset, whether it is a fleet of vehicles, a suite of IT, or plant in a factory. The financier can simply purchase the asset from the customer and lease it back at a reasonable rate, freeing the cash for re-investment.
We must shout louder about these benefits. And then we must deliver. We must show we’re hungry for business, that we understand our customers’ needs, and know how to meet them. The lifeblood that asset finance provides, that unlocks cash and powers growth, is critical to SMEs. We mustn’t fail them.
Posted June 30, 2010
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