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Asset Finance Business Confidence Survey – Battening down the hatches

Invigors, in conjunction with Leasing Life, recently conducted a pan-European survey of professionals across the asset finance industry. The objective was to establish a benchmark of business confidence within the sector and to provide some pointers as to the direction in which the industry is heading.

Despite optimism on new business volumes and a bullish outlook regarding the potential for acquisition, there is clear evidence that a storm is now hitting the industry. Worries over bad debt and restricted availability of capital is resulting in tougher underwriting criteria, reduced service levels and pressure to reduce costs. While many lessors see opportunities in the current fallout, our survey raises questions on whether all these ambitions can be realised.

Outlook on new business still bullish

Notwithstanding the credit crunch and recent turmoil in the markets, over half of those taking part in the survey still expected an increase in new business over the next six months - with most anticipating an increase of over 5%. Survey respondents from Continental Europe were notably more optimistic than those in the UK, where the effects of the credit crunch appear to be more keenly felt.

Focus on increasing margins

It is no surprise that many lessors are looking to improve margins. 45% of respondents expected margins to increase over the next six months with over 20% anticipating a rise in excess of 25 basis points overall. No more than 15% expected margins to fall and most of these thought the decrease would be under 25 bps.

Banks or bank-owned lessors were the most aggressive on margins. Nearly 80% of these expected margin growth over the next six months with the majority predicting an increase in excess of 25 basis points. Other groups were more mixed in their response, under 40% of independent finance companies expected margins to improve while brokers and captives were clearly under more pressure with no more than a third anticipating any form of improvement.

Bad debt remains a concern

There was little optimism apparent when it comes to bad debt. None of the respondents expected this to fall during the next six months. Nearly two-thirds of those surveyed thought bad debt would increase, though most believed this increase was unlikely to exceed 25%.

The research supported evidence of a relationship between margin growth and bad debt. Nearly three-quarters of those anticipating margins to increase also expected an increase in bad debt. Funders are clearly looking to increase margins in order to cover a growing bad debt ratio, and there's a growing recognition of the need to achieve a return on the increasingly scarce liquidity available to them.

Capital availability is being squeezed for some lessors. Just over half of those surveyed expect capital availability for their business to remain the same but 37% expected this to decrease over the next six months - typically by up to 10%.

The impact of credit crunch can be seen in restricted availability of capital, tighter underwriting criteria, cost reductions, and aversion to risk. Nonetheless the survey findings are not as pessimistic as events elsewhere in the finance industry would suggest. Is the asset finance sector in denial or is it more robust than other finance sectors under the cosh?

To obtain a copy of the survey findings, please e-mail richard.ryan@invigors.com

Improving credit management - new research

With the market indicating a worsening trend in overdue accounts, the "credit crisis" causing liquidity issues for many firms and margin pressure for good customers, in 2008 effective credit management will be more critical than ever for finance companies seeking to maintain current profit levels.

Many credit professionals will have limited experience of managing in a downturn.  Existing information requirements, processes, policies and skill levels may not be sufficient.

While much focus has been placed by finance companies on Basel II related credit analysis and risk-based pricing models, new research undertaken by Invigors and Leasing Life has highlighted that the most important drivers of improved credit management are likely to be training with both credit and sales departments, improved information flows and internal management focus.

The nature and scale of change required will vary between companies.  How ready is your organisation, how skilled are your people, how effective are your arrears management processes, do your communication and feedback loops between credit policy, sales and credit management really work?  These things can be quickly established with an independent audit of current operations. For more information contact Peter Hunt on +44 845 003 1000 or e-mail peter.hunt@invigors.com

Source: European Credit Research, Leasing Life 1/08, Q30. “How important are improvements in the following areas, in terms of increasing performance in credit management in your business?” n = 36

Funding Green Assets - Where's the action?

Despite the high profile given to the “green” sector and the emphasis on the need for finance in order to promote its growth, evidence on the ground suggests limited interest from lessors so far.  Invigors' recent research into the sector  has shown that, despite the availability of finance being a clear barrier to growth, neither vendors nor funding providers in the UK are being pro-active in addressing the problem.

The situation is most acute in the  small-scale renewable energy sector, which consists primarily of solar thermal (domestic and commercial heating), plus microgeneration from solar photovoltaic (PV) systems and wind power.  It's not hard to see why:-

• The sector is  subscale  – our research indicated that the total asset market in the UK is no more than £100m, hardly enough to get lessors excited
• The market structure is highly fragmented – although a number of major manufacturers have entered the sector, these are mainly component suppliers.  Actual installation is still a cottage industry (for example the largest installer of solar PV systems has a turnover of only £14m)
• Much of the demand is currently from the residential sector which will not appeal to many funders
• The availability of government grants has had a stop-start impact on the sector.

And of course with installations on buildings, the main finance requirement is for retrofit since in new builds any renewable component is simply reflected in the total price. Add in technical, performance and supplier risk and the overall appeal of the renewable sector is enough to challenge even the most determined lender.

However despite this there is some upside to the market.  It's currently growing strongly, by around 40-50% per annum, driven by legislation and rising energy prices. Phase 2 of the Low Carbon Buildings Programme offers generous grants to the public sector for renewables installations, though it's much more stingy towards the residential and commercial sectors.  Also the Renewable Obligation Certificates (ROCs) have just been doubled for microgeneration – these are the “green credits” issued by OFGEM to renewable generators which can be sold on the open market.  Finally the feed-in tariffs offered by a number of utilities are starting to look more attractive, though nothing like as good as the subsidised feed-in tariffs in Germany (these are the tariffs paid by power supply companies for surplus electricity from microgeneration installations which is fed back into the local grid).

As a result, we’re seeing a number of niche financing opportunities and have started working with suppliers to create vendor finance solutions across a number of market sectors. 

With energy prices forecast to increase by up to 40% this year, it looks like the outlook for the green asset sector can only get better.

For a more detailed market review or to discuss specific opportunities in the renewable energy sector contact Richard Ryan on +44 845 003 1000 or e-mail: richard.ryan@invigors.com

Unlocking Value in Vendor Finance – Where’s the Key?

Invigors recently initiated a study into how vendors and financiers could unlock more value from their vendor finance programmes. Our initial research focus on vendors has revealed some interesting insights into some of the issues they face.

Could do better

The research covered a range of small to mid-ticket asset finance programmes, from IT to mechanical handling and construction equipment. Although penetration levels understandably varied by type of asset, 50% of vendors interviewed enjoyed penetration rates of less than 20%, though half would like to increase this level to over 50%. There is clearly an opportunity here for funders to research what is realistically achievable and audit the programme to identify and break down barriers.

In fact around 70% of vendors believed that the barriers to increasing penetration rates were internal, rather than down to their finance provider or their customer base.

Looking at this in more detail it seems that lack of focus at the point of sale is the main issue, other factors such as lack of senior management support for the programme, or lack of strategic focus seemed to be less significant.

How can finance providers address what is clearly a vendor issue? Well, better knowledge of the vendor salesforce or reseller base though insight surveys would be helpful in developing the right strategy. At a tactical level this should be coupled with specialised salesforce training and better integration of finance with marketing initiatives.

4 Year Itch

The study has revealed a market more dynamic than we expected. 60% of vendors had changed their finance provider within the last 2 years and around 40% expected to fundamentally review their primary funder within a similar period. Again this highlights the importance of keeping a close working relationship which can be maintained through regular programme audits, facilitated joint workshops and regular satisfaction surveys.

The relationship between vendor and finance provider seemed somewhat mixed. On a positive note, 80% of vendors felt that their finance provider understood their business quite, or very well. Tensions existed however in the relationship of around half those interviewed, primarily in areas such as resource constraints, delivering against commitments, “open book” financial arrangements and conflicting objectives. Is this a wake-up call for some providers to start treating the programme more like a relationship? Perhaps a more formal, focused approach using facilitated workshops will enable both parties to work through the issues and reach a common understanding.

Measuring value – a missed opportunity?

Despite some criticism over conflicting objectives, most vendors felt that their programme metrics were reasonably well aligned with those of the business. And when it came to measuring the value of their finance programme, over half of those surveyed thought that they’d done this satisfactorily. However only 14% considered that this had been done “very well” as a joint exercise with their finance provider, pointing to a missed opportunity to build the relationship and understand the programme value together.

Quality not Quantity

Looking at the support provided by finance providers in more detail it’s apparent that there some other concerns. Although vendors are generally satisfied with the quantity of people resource allocated to their finance programmes, 40% have some concerns about the quality of these people. There is a similar pattern evident too when it comes to training. Maybe time for a skills audit and specialist training programmes? And is the quality of training sufficient? Research feedback suggests that finance providers should review their requirements against vendor expectations, not just taking a narrow view of internal constraints.

If you would like to learn more or take part in Invigors research programme on vendor finance, then contact Richard Guilbert on +44 (0) 845 003 1000 or e-mail richard.guilbert@invigors.com.

Asset Finance - fuelling SME expansion?

How important is asset finance in enabling SME growth? There’s little doubt that asset finance plays a fairly key role in financing small business and as a result, furthering the overall expansion of the SME business sector. FLA figures show that its members provided £27.2 billion to the UK business sector and public services in 2005, accounting for just over 30% of capital investment. No doubt a significant proportion of this was taken up by SME’s.

But the SME sector itself is far from homogenous. How does the usage of asset finance vary within it? There was some useful data on this topic published in last year’s UK Survey of SME Finances by Warwick Business School, which analysed take-up by size of business and finance type. Interestingly, of the three types of finance covered in the survey – bank overdrafts, bank loans and asset finance, it was the latter that showed the greatest difference by company size.

The relative importance of asset finance to larger SMEs was highlighted in the data - three quarters of medium enterprises (50 – 250 employees) made use of asset finance compared to less that 40% of micro-businesses (<10 employees). By comparison the take up of bank overdrafts and loans showed less variation.

A similar pattern was evident when looking at take-up by company turnover. Asset finance was more widely used than overdrafts or bank loans by businesses with a turnover of more than £5m – here the penetration was greater than 80% compared to less than 15% of micro-businesses turning over less than £50,000.

Of course not only are bigger businesses more likely to use asset finance but they seek finance for larger amounts too. The Warwick survey estimated that the average monthly repayment on asset finance was around £10,000 for medium and £8,000 for small enterprises. This was three to four times the same average for micro-businesses. In terms of funding potential this highlights that the small and especially the medium enterprise segments are a sweet spot for targeting asset finance. Against this asset finance must consider cost of sale, with many medium sized businesses acting as mini-corporates.

But size of business is just one simple means of segmentation. What about others such as age of the business and turnover growth? The Warwick survey looked at the differences in take-up of finance between SME’s less than two years old and those which were older. Predictably older businesses had a somewhat higher take-up of both asset finance and bank overdrafts (especially as many finance providers don’t underwrite early-stage businesses). There was no significant difference in the penetration of bank loans, with many new businesses started with a loan. Perhaps there is potential for substituting this with some form of asset finance, especially where the start-up business is reliant on long-life capital assets.

Differences in finance take-up were much more marked when company rates of growth were considered. The survey compared SMEs with different rates of historic growth – less than 30% growth in turnover against those with a rate greater than 30% over the past three years. We have always maintained that there is a fundamental difference between SMEs which are a “lifestyle business” and typically exhibit low growth rates and those which are “growth oriented” being typically more aggressive and focused on expansion.

This data shows that growth-oriented businesses, whilst possibly representing a higher risk, offer asset finance providers greater potential business. Take-up of asset finance by high growth (>30% turnover) SME’s was 35% compared to just over 25% for the low growth group. This compared to no significant difference in bank loan penetration between the two groups and, surprisingly, a lower take-up of bank overdrafts – 55% by low growth SME’s compared to under 50% by high growth ones. And the average monthly repayments were nearly twice as much for the high growth SMEs compared to their slower-growing counterparts. So is the risk offset by the potential reward?

Clearly a one-size-fits-all strategy is inappropriate when focusing on the SME sector and, as this survey shows, even some simple market segmentation can yield benefits in terms of balancing business potential, risk and cost of sale. If your organisation has an SME focus is it realising these benefits?

Vendors and vendor finance partners can't agree

Our recent article for Leasing Life highlighted differing views on the performance of international vendor finance programmes. No matter what the reality, vendor finance providers are clearly happier than their vendor partners.

Why is this? Certainly, the complexity of international vendor finance, with sensitivity to local market and regulatory conditions, can easily be at odds with a vendor’s drive for consistent, uniform delivery. Or perhaps, in all this complexity, sometimes the programme objectives get sidelined by corporate growth targets, local P&L demands, short term perspectives, higher priorities, poor training, unrealistic expectations or a lack of commitment (from either party).

As a result, programmes are vulnerable and switching of programme partners will continue. Yet this often makes little sense for either party - however difficult existing partners may be, increasing volumes from existing programmes is surely a low risk growth strategy that deserves attention.

In carrying out vendor-specific research for clients, we’ve found huge areas for potential improvement. However, taking a cold, hard look at your programmes from the vendor’s perspective will expose weaknesses that must then be addressed and force organisational change – who’s ready for the challenge?

For more information on vendor finance research services, please contact peter.hunt@invigors.com,

Vendor Finance - good or bad?

In March, we presented research at the Leasing Life / Leaseurope International Vendor Finance conference that highlighted that finance companies aren’t living up to their vendors’ expectations. In particular, finance companies failed to help increase sales or provide competitive advantage, the two main vendor aims and surely a big part of every finance provider’s sales pitch (full presentation here at our website). 


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Finance provider performance in terms of operational support and relationship skills also showed low levels of vendor satisfaction. Over half of the vendors surveyed stated they were “Dissatisfied” with their finance partner.

What’s been your experience? As a vendor, how satisfied have you been? Why? What could be done about it? As a finance company, what’s your side of the story? Send us your feedback using the Comments link below.

The Battle of the Sexes

And other interesting things about SMEs.

Warwick Business School in association with the Bank of England, the FLA and others – have just published findings from a study into SME financing (companies with under 250 employees, but very heavily skewed to the below 10 employee category).

From the survey of a representative 2500 companies, we’ve included a few facts that we think will interest you.

Types of finance

27% of SMEs use asset finance (leasing and HP). Primary uses are for vehicles (72%), IT equipment (11%) and machinery (9%).

However, there appear to be substitute opportunities (or threats) with other types of finance. 24% of SMEs use term loans, of whom 16% use them for working capital, 15% for vehicles and 9% for machinery. 55% used credit cards, of which 12% used them for funding equipment and vehicles, and 5% other fixed assets. The substitution factor was highlighted as companies using asset finance were shown to be 25% less likely to use term loans.

Only 3% of SMEs were using invoice finance, suggesting continued growth opportunities for factors and invoice discounters.

Getting finance

44% of SMEs have sought finance in the last 3 years. 39% have sought asset finance – even with some repeat business this is unlikely to amount to over 20% of companies per year. Clearly, for most SMEs asset finance is an infrequent finance purchase that may require lessors to sell complementary products or services, work through intermediaries or apply cost-efficient contact management (web, telephone etc) to be effective.

Only 5% of those seeking asset finance were rejected (the lowest of the various finance types). 95% of those not seeking finance hadn’t identified a need. As a result, there does not appear to be a large amount of untapped potential, more a requirement to position asset finance as superior to alternative funding sources to SME.

The majority of SMEs are over 15 years old, with only 7% are aged less than 2 years. It’s too easy and not accurate to think of SMEs as suspect credits, just because they’re small.

59% had only one finance provider (including banking). Bank relationships can dominate since the average SME banking relationship is over 15 years old, driving sales opportunities for bank-owned lessors able to tap into the customer franchise of the parent bank. For other finance suppliers, the development of a broad product range may increase market appeal.

External advice

One in three SMEs use accountants as their main source of financial advice; for one in six, it’s the bank manager. As a result, asset finance companies should consider how they target these influencers.

Over a third of SMEs take no external advice. Only one in six sole traders and partnerships have their finances managed by someone with a financial qualification.

A woman is the principal owner in around 20% of SMEs. A majority female owned SME is more likely to use an accountant that a majority male owned firm, and more likely to take external advice. Since the research identified an equal level of self-confidence as with male-owned firms, does this represent a more open management style, and the ability to leverage expertise more effectively?