FLA MARKET INSIGHT - ASSET FINANCE
The asset finance industry and Covid-19 pandemic
One year on the data shows the industry has remained resilient through yet another crisis
By Geraldine Kilkelly, FLA’s Director of Research and Chief Economist
Asset finance through the provision of leasing and hire purchase supports investment by businesses of all sizes. It gives businesses the opportunity to invest in the latest machinery, equipment and vehicles without having to pay the full cost upfront and therefore allows them to better manage their working capital and cashflow. Pre-pandemic, annual asset finance new business for equipment investment reached a record £35 billion in 2019 and £20 billion of this total went to SMEs.
Following the initial restrictions put in place to deal with the Covid-19 crisis last March, asset finance new business fell by 49% in Q2 2020 compared with the same quarter in 2019, and the quarterly penetration rate shrank to 30.4%, its lowest level for almost eight years (Fig. 1). Disruption to business finance markets caused by the introduction of Government loan schemes to help businesses through the pandemic as well as the reduction in demand were key contributors to the record fall in the asset finance market. SME demand for government grants and loans was predominately to deal with issues arising from the pandemic, while those seeking finance to purchase fixed assets fell from 30% in 2019 to only 12% in 2020.1 The underlying strength of the asset finance market was demonstrated in the second half of 2020 when more normal levels of new business resumed. By the third quarter of 2020 the penetration rate had recovered to 38.3% as business returned to more traditional forms of external finance. Leasing / hire purchase continue to be the alternative finance product used by the largest proportion of smaller businesses and the most popular external finance product sought by larger businesses.2
With the asset finance market supporting businesses across all sectors of the economy and in all regions of the UK, the impact of the pandemic on the industry largely reflected the impact on the wider economy (Fig. 2 and Fig. 3). Construction, manufacturing and agriculture have continued to operate in some form over the last year and reported much smaller falls in output than the hardest hit consumer-facing sectors of accommodation and food services. Growth in online sales to record levels has also driven business demand for commercial vehicles. FLA latest asset finance figures showed growth or near similar levels of new business in many of these sectors. New finance for agricultural equipment and new light commercial vehicles grew by 13% and 1% respectively in the three months to January 2021 compared with the same period a year earlier. New finance for construction equipment fell by only 4% over the same period, and in total plant and machinery finance decreased by only 7%.
The Office for Budget Responsibility’s forecasts published alongside the 2021 Budget suggest that the Chancellor’s announcement of a temporary new "super-deduction" allowance for investment in qualifying plant and machinery will encourage businesses to bring forward investment and lead to business investment growth of 16.6% in 2022. The recovery in business investment will be as much about catching up on the investment lost following the EU Membership Referendum when increased uncertainty meant many businesses put investment on hold (Fig. 4). The resilience shown by the asset finance industry through the latest crisis means that it is well place to play a significant role in the recovery. It has a proven track record of supporting businesses and the expertise to deliver the investment needed to enhance productivity and build the sustainable future that will be necessary to increase the UK’s long-term growth potential.
Note 1, 2: British Business Bank 2020/21 Small Business Finance Markets Report and 2020 Business Finance Survey.
Note 3: Fixed capital investment defined as machinery, equipment and purchased software.