Earlier this week I had the pleasure of speaking at the Institute of Directors’ Annual Convention at the Royal Albert Hall in London – a unique event bringing together people from across business, politics and academia to discuss the most pressing issues facing Britain today.
Unsurprisingly, Brexit and its implications featured high on the agenda. As the argument over how the UK will fare rages on, one thing on which most of us seem to agree is that increased uncertainty will be a fact of life for a while to come.
In such conditions, it’s usually the young, early-stage businesses which face the biggest challenge. For those firms, accessing traditional sources of finance such as bank loans is tough at the best of times. When there are even more unknowns, it becomes harder still.
So what options are available for small businesses to invest in the assets they need to continue to grow?
While loans, overdrafts and credit lines are still the most widespread debt financing tools for SMEs, alternative sources such as leasing – as I explained in my speech – are increasingly coming to the fore.
A leased asset is made available to the lessee on the assumption that profits are generated through the use of that asset rather than its ownership. The lessor’s only real concern is therefore the ability of the lessee to generate cash flow from the business operations in question.
In contrast to conventional bank lending, which may be unsecured or else tied to some form of collateral, leased assets are a form of collateral in and of themselves. And as leasing decisions tend to be in response to immediate commercial requirements, both lessor and lessee are exposed to significantly lower risk.
That reduced risk – particularly for the lessor – gives smaller, younger companies with limited track records and credit histories access to capital equipment they would have far less chance of accessing via traditional lending.
But credit conditions are by no means the only driver of demand for asset finance – or even, for that matter, the most important.
With the pace of technological change continually accelerating, it makes little sense for a business to lock itself into a large capital commitment on an asset that could quickly become obsolete.
That’s why we’re seeing a growing number of small businesses opting to lease, which enables them to trade up quickly as and when newer and better technology becomes available. In the UK, SMEs are now estimated to be financing between 25-30 per cent of new investment through leasing.
But while that upward trend is encouraging, we need to be going further. We’re hearing a lot at the moment about the ‘productivity puzzle’ – a slowdown in productivity across the developed world that’s keeping economists awake at night. Figures suggest Britain is among the worst affected. Our productivity is currently at its lowest since records began – the second-lowest in the G7 and lagging behind most of the other big European economies.
One of the ways we can bridge that gap is by moving towards more dynamic funding models which give small businesses the agility they need in today’s landscape. That means as non-bank lenders we need to broaden our thinking about what these companies need, and offer tailored solutions to help them realise their potential. And we need business-friendly government policy that ensures access to alternative finance is as straightforward as possible.
SMEs are the cornerstone of the UK economy, accounting for 60 per cent of private sector jobs and almost 50 per cent of private sector revenue. That’s an essential engine of growth and one we can’t afford to leave behind in a world of rapid change. Lenders and policymakers need to think creatively about how to adapt our existing models to be more flexible and responsive, and to give small businesses the financing tools they need to invest and grow.
All the big guys were small once. If we want to keep producing companies that compete on the world stage, we need to take action now to give them the best possible start.
Robert Gordon is CEO of the UK arm of Hitachi Capital.