By Richard Hemsley, Managing Director, Lombard,
As the country climbs out of recession, small and medium enterprises (SMEs) have an essential role to play in ensuring the recovery is sustainable. The lifeblood of the UK economy, SMEs are helping to drive growth, open new markets and create jobs, but are they ready to take advantage of the opportunities these circumstances present?
It’s imperative that UK businesses don’t simply live in the present, but take a longer-term strategic view. If UK PLC is to do more than simply survive the recession, the SME business community must put itself into a competitive position, not only within our domestic marketplace but within Europe and beyond. If the infrastructure is in place, SMEs will be able to take advantage of the opportunities that will secure the long-term future of the UK economy and those that operate within it.
Investing for growth
In order to achieve the necessary level of investment, I believe we need to see a shift in the way that businesses finance their assets. Greater consideration should be given to efficient use of capital, as well as to the most effective way to fund and manage equipment, whether it is upgrading IT resources or investing in new machinery.
There are many forms of finance available, and it may no longer make financial sense to adopt one form of funding only, but instead to consider a portfolio of finance channels where you can make the most of the benefits of each.
As part of this portfolio, SMEs should consider asset finance. The Finance & Leasing Association (the industry body that governs the leasing sector) states that one in three small businesses that have any external borrowing uses asset finance. Figures released by the association in June 2014 show growth of 10% in asset finance new business during April 2014, compared with April 2013.
What is asset finance
For those unfamiliar with asset finance, it’s a form of specialist business funding where the asset being funded acts as the security, this makes it a very accessible form of finance. Effectively, spreading the cost of payments over an agreed term makes it easier for a business to acquire assets such as technology, vehicles, plant and machinery. In addition, by aligning contract terms to the life of the asset, or the length of a particular contract, it provides financial flexibility and protects valuable cash flow. This in turn helps to support growth.
Many know about asset finance in the form of leasing or hire purchase for cars and vans, but the scope of fundable assets is actually huge – from wheelie bins to aeroplanes.
The benefits of asset finance
Minimize risk – the asset finance provider takes the risk on how much value remains in the asset at the end of the contract, and in some instances will also take responsibility for the disposal and management costs associated with ownership
Release tied up cash – through a sale and leaseback facility (where you sell the asset to the asset finance provider and then lease it back)
Help eliminate uncertainty – fixed rental costs and payable interest for the duration of the contract help businesses budget for the future
Increase flexibility – ideal for businesses that operate within a seasonal environment, or are looking to release the locked-in value within the business.
It’s really important that SMEs do not hold back on investment plans, and indeed a survey of 1,168 SMEs (by Clydesdale & Yorkshire Banks) indicates that more than four out of five small businesses already plan to invest up to 7% of their turnover into business growth.
However, having the right funding solution to achieve this is essential, and I would urge SMEs to fully explore what is available. It’s also worth noting that the Annual Investment Allowance has been temporarily increased to £500,000 until the end of 2015, which gives businesses just under 18 months to claim the allowance on eligible purchases up to £500,000.
You can find further information about how much AIA could be worth to you using our calculator here.
By investing in their business now, SMEs will be in a stronger position to take advantage of economic growth, and in doing so be securing their long-term future.