A “lack of basic awareness” of asset based lending among small businesses is costing the UK economy billions every year, says Susan Allen, chief executive of Royal Bank of Scotland’s asset finance arm.
Last month the Government opened its Funding for Lending Scheme (FLS) to providers of asset finance and leasing, which allow businesses to release cash from machinery. This was a welcome move to provide attractive rates of borrowing to companies which urgently need to update ageing equipment, or obtain new technology.
Lombard, which is RBS’s asset finance arm, has conducted research for the second year running on usage and awareness levels of asset finance. Our survey of 600 UK companies, mainly small and medium-sized companies, exposes worryingly low levels of investment. UK firms have limited awareness of asset finance, and the consequences are stark. Companies are turning down business because they do not have the right machinery or technology in place. A conservative estimate of the loss of potential business to SMEs in the UK is upwards of £5.4bn.
A lack of basic awareness of this form of lending – our survey shows two-thirds of companies do not know of its existence – needs to be urgently addressed. Information direct from lenders, as well BIS and the industry’s body, the Finance and Leasing Authority (FLA) needs to be targeted to the right SMEs. But there is also a role for the accountants and advisers, who are often the main source of financial information for small companies.
There is also a need to update the image of asset finance to meet the requirements of today’s customers. The traditional image of capital goods – plant and machinery – paints only part of the picture. Though manufacturing remains the biggest sector we finance, and we have seen lending increase in this area by 66pc over the past year, IT and technology is the area of highest demand amongst the companies we surveyed. Innovative finance options are developing to cater for this demand, such as a recent software deal to protect a company’s intellectual property rights.
We also recognise that banks need to improve how we reach out to customers. At RBS, for example, we are piloting a scheme to streamline the guidance and processes for customers to provide access to the wide range of finance options available. This is crucial because our survey shows that nearly two-thirds of businesses are paying for capital expenditure from their own funds. This will be the right option for some, but in many cases alternative sources to finance assets are less risky and better value for money.
This matters because the profits in companies which are investing are growing or remaining stable. Meanwhile, UK companies which are turning down contracts rather than investing in capital assets, are finding themselves with higher maintenance bills, and unreliable machinery.
One of the biggest barriers we need to overcome is a lack of confidence in the economy, which leads to caution. Companies are often choosing to sit on their cash, and protect what they have. This protects jobs, which is welcome, but it does not create new ones, or get the economy moving.
To achieve this concerted effort is needed across the board from the industry body, banks and advisers. This includes ensuring that awareness levels are raised, as well as facilitating take-up of time-sensitive policy measures designed to encourage capital investment. In addition to bringing asset finance under the FLS, the Government has recently increased the Annual Investment Allowance to £250,000 on capital expenditure until 2015, meaning companies get generous tax breaks for investing. We need to make sure companies and their advisers are familiar with the advantages these measures offer.
The IMF’s latest annual health check on the UK economy warns that the long-term stagnation in the economy risks “a permanent loss to productive capacity”. Should companies use outdated equipment for too long, not only does the machinery eventually wear out, but the experience and skills associated with new technology are lost too. Contracts which could have catapulted a business to the next level and helped them access new markets may be permanently lost.
It is not just Germany which is investing far more than us – it is Turkey, Mexico and Italy. Many countries easily outstrip the UK’s rates of investment in specialised production machinery and the competition is fierce. We need to get from the back foot to the front foot – and fast, which means everyone playing their part to stimulate the growth that the economy desperately needs.
Susan Allen is chief executive of RBS’s Customer Solutions Group.
[Telegraph]