Economic Recovery

The dilemma for many businesses is that during a recession capital expenditure gets put on hold, adding further fuel to the downturn. Yet it is during a recession that businesses should be positioning themselves to take advantage of the opportunities presented by a subsequent upturn. This, in turn, requires capital investment in the equipment they need to deliver growth and jobs.

Leasing can play a vital role in the recovery of the world economy, but it does require governments to play their part.

The FLA view – removing the barriers

The government has intervened massively in the financial markets since last October, but has focused on bank lending to the exclusion of other types of provider.

The government should recognise the strong case for leasing and remove some of the barriers to this form of investment.

It makes particular sense for businesses to invest using asset finance (leasing and hire purchase). Asset finance is accessible and affordable because it is secured on the equipment being leased. It provides certainty, as it will not be withdrawn during the term of the lease. It is often the most economical way to obtain the equipment businesses need, when they need it.

But there is already a significant gap between normal and current levels of SME investment using asset finance of at least £5 billion per year.  The Government can help close this gap by removing three key barriers to business investment via asset finance:

• First, the Bank of England’s facilities for financing working capital have, up to now, excluded equipment leases. Although the Bank has recently indicated it might extend the Asset Purchase Facility to cover equipment leases, the suggested terms will not work unless they are changed significantly.
•  Second, the Government’s Enterprise Finance Guarantee (EFG) for business investment also excludes equipment leases. By remedying this, the Government could support substantially more marginal businesses through lease finance, and at lower risk because of the security the assets provide.
• Third, the Government’s capital allowances, which are aimed at giving businesses tax breaks to encourage investment, also exclude leasing. Leasing companies cannot claim the capital allowances on equipment that businesses are able claim if they purchase the equipment outright. Changing this ruling would make asset finance cheaper and more widely available. It would allow leasing companies to feed the benefit of capital allowances to many SMEs who currently do not have the tax capacity to claim them. A further sensible step would be to introduce new capital allowance arrangements to support leasing.