How Asset Finance is supporting business through the COVID-19 crisis
Keith Softly, Managing Director, Asset Finance, examines what has been happening in the Asset Finance market during the coronavirus pandemic and what the future may look like.
Article published date- 28/07/2020
Towards the end of 2019, the Asset Finance market represented over £35 billion of new business lending. That reflected the role Asset Finance plays within the UK economy in supporting the funding of capital expenditure and helping businesses invest in their growth plans.
It’s fair to say that the market has been unavoidably impacted as a result of COVID-19. In the three-month average up to around May, new business lending was down 43%(1). And although the 12-month average is probably down closer to 12%, the short-term difference in terms of activity is noticeable.
There has been severe disruption, with resellers and distributors forced to close, plus breakdowns in the supply chain and the infrastructure around that, affecting imported assets and machines coming from different parts of the country.
For clients who have existing Asset Finance facilities we’re working to mitigate the impact on their cash flow and support them as they weather and emerge from the crisis.
When the crisis first hit, there was significant client anxiety. Disaster recovery plans tend to focus on what happens if there's an event at a building or at a location. They rarely assume that you've got to change everything at once, which is what the majority of organisations had to go through very quickly.
The main mechanism through which we could quickly support clients is the capital repayment holiday where, effectively, we cancel their direct debit for three months and reschedule the financing arrangement. There is also the option to extend the repayment holiday for a further three months if needed.
We worked closely with our credit teams to ensure that we had the ability to respond very quickly to client requests and we could see the tangible relief for clients when they knew that – for at least some of their business – they were going to have some form of support.
We’ve found that while some businesses immediately needed the repayment holiday, others took it but then realised it wasn’t needed. Either their trading position was better than expected, or there were other support schemes coming online, such as Bounce Back Loans and the Coronavirus Business Interruption Loan Scheme (CBILS). We've also recently launched an Asset Finance variant of CBILS, to support clients who have a need to finance their capital expenditure.
Another option is that if a client has recently bought an asset we can do a sale and hire purchase back on that equipment, effectively releasing the working capital back to them.
Good and not-so-good news stories
The pandemic has affected some sectors differently to others. Agriculture, construction, transportation, IT and waste have all been quite good news stories, trading better than anticipated. This is probably reflective of the fact that some of these businesses continued to operate during lockdown, providing vital services.
On the flip side, there have been some businesses that will, unfortunately, exhibit a much slower recovery, certainly those associated with leisure and tourism, or seasonal businesses.
But what we're starting to see now is some businesses beginning to trade through this period more predictably.
From an Asset Finance perspective, what's positive is that there is some degree of pent-up demand. Those businesses where the supply chain shut down had deferred their ordering, so we're seeing a reasonable level of new business inquiries come through, and that's started to build over the last three months.
We are also now seeing clients who would typically be cash buyers using Asset Finance so they can keep money in the bank and spread costs over a period of time.
Businesses are also diversifying and starting to think about how they might change the operation of their teams. This tends to involve extensions of existing propositions, so in food production, for example, a company may look at taking on more of the supply chain within the business.
Looking to the future
My prediction for Asset Finance is that there will be a levelling off of new business and then it will start to tick up – not in all sectors – but there will be enough overall growth that the market will start to progress and move forward again.
We're seeing positive signs in terms of the need for capital repayment holidays slowing and an increase in new business inquiries. But while there are some positive signals, it feels like very early days.
The challenge we're all very conscious of is that some of the government support will start to be removed. Ideally, I hope that support endures for longer and eases us into a further recovery rather than us having to deal with a hard shock in Q4 when furlough stops or government support schemes come to an end.
Asset Finance is a terrific industry. Despite all of the recent uncertainty we need to keep a long-term view around how we continue to work with clients, how we support their businesses and how integral the Asset Finance industry is to the UK economy. Investment in equipment and machinery which helps businesses increase productivity, improve efficiency and become more sustainable can only create a positive link to economic recovery.
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