Leasing will help to fix 'Rusting Britain'

By HELEN LOVELESS, MAIL ON SUNDAY ENTERPRISE EDITOR
Updated:

 

The prospects for recovery and growth of many small firms are being put at risk because of problems in replacing equipment.

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Replacement: Finding new equipment for SME's is causing problems

Research carried out for the Finance and Leasing Association shows that business investment fell by 27% between April 2008 and the end of last December as the recession took its toll.

Nearly a fifth of small business owners say they have not been able to replace operating equipment while 6% report that this is posing a risk to the success of their business.

Manufacturing has been hit hardest, with a quarter of all firms in the sector saying they have been unable to replace equipment.

The reasons for firms being unable or unwilling to invest range from poor cash flow or lack of internal reserves to uncertainty over growth and the increased cost of new equipment combined with the difficulty in accessing finance.

Julian Rose, the head of asset finance at the FLA, says there is a risk that firms will not have the right capital equipment in place to meet increased demand when the economy recovers. This in turn could leave Britain trailing other countries in competitiveness.

'The fall in expenditure on business equipment is far worse than during both of the last recessions,' he says.

'This suggests that firms are taking longer to replace capital equipment at a time when the service life of many assets tends to be shorter than before, for example machinery becoming obsolete more quickly.

'With technology advancing so quickly, many firms may be left with outdated equipment that could badly affect their competitiveness.'

Although Chancellor Alistair Darling warned last week that the Government would fine banks that failed to lend enough to viable businesses, the FLA believes that lease finance may be worth considering for firms struggling to access capital.

In response to the figures showing a sharp fall in business investment, the FLA is launching a campaign called Rusting Britain.

It aims to lobby the Government for more fiscal incentives for business investment and hopes to encourage small firms to invest in their businesses, in part through leasing.

Research by forecasting consultancy Oxford Economics suggests that if leasing was used to finance £5 billion of business investment in 2010 it could contribute nearly £2bn to gross domestic product and lead to the creation of almost 40,000 jobs.

Asset finance, which includes leasing and hire purchase and is typically provided by leasing firms, manufacturers, brokers and banks, is used to fund nearly 30% of business capital investment.

About 750,000 small and medium-sized businesses currently use leasing to hire equipment, typically for three to five years.

Rates vary from seven per cent to nine per cent on most leasing deals, though firms with a higher risk profile may have to pay ten per cent or more.

A key benefit of leasing is that small business owners are not left with outdated equipment that they cannot afford to replace but is worth nothing at the end of the term.

Instead, they can access the latest technology by paying rent. There are many benefits for firms of having new equipment, which typically will be more efficient as well as more environmentally friendly.

As part of Rusting Britain and to help small businesses invest in new equipment, the FLA wants the Government to make all leased equipment eligible for taxenhanced capital allowances.

This, it claims, would cut the cost and increase the availability of lease finance. At present, firms can claim capital allowances only on equipment they buy outright, or through a hire purchase agreement, or if the lease is seven years or longer.

Stephen Alambritis, the chief spokesman for the Federation of Small Businesses, believes leasing is an option worth considering, though he adds that it is likely to be more suitable for 'slightly larger small businesses, than the really small ones'.

'Micro businesses are unlikely to look at leasing, as generally they prefer to be in control of what they own and are not fans of openended agreements and renewals,' he says.

'Many business owners also prefer to own assets, so that they can form part of their pension. However, leasing as an option should definitely come into its own in these difficult times, even if it is not a panacea.'

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