Can leasing capitalise on rising interest costs elsewhere?
Only a tenth of UK business lending is fixed-rate, and the proportion keeps falling. Can leasing’s staid repayment proposition become one its main USPs? By Lorenzo Migliorato
One of the main selling points of leasing is undoubtedly the regularity it bestows upon a firm’s cashflow. The lessee knows how much they’re going to spend each month in principal and interest, and short of sudden shocks to income – say, a fall in price for a commodity – they can be fairly aware in advance of the region their balance will be at the end of the quarter.
In the current lending landscape, such regularity is a virtue. Data analysis from debt adviser Hadrian’s Wall Capital found that as of 2017, only a meagre 11% of the UK’s £416bn (€478bn) outstanding business loan stock was fixed-rate, down from 18% in 2016.
The trend is all the more worrying considering that an increasingly hawkish Bank of England (BoE) has hinted at additional base rate rises to come, following the one from 0.50% to 0.75% in February.
"Fixed-rate loans are now virtually unavailable from banks, and may SMEs are reliant on floating rate debt,” said Marc Bajer, Hadrian’s Wall Capital chief executive. “Any jump in interest rates could see small businesses burned.”
Yet another, more positive trend has developed in business lending over the same time as banks tightened the supply of fixed-rate loans. Over the course of the last decades, the UK asset finance sector has grown massively – £32bn of new business in 2017 alone, according to trade body the Finance and Leasing Association (FLA).
And yet, the switch to secured, fixed-rate facilities was not enough to halt the fall-back on variable-rate lending. Part of the reason is arguably that in an environment where base rates were being constantly slashed, variable-rate loans were at least as attractive as a fixed-rate leasing offer – why the advantage of owning the asset at the end, which many firms still see as desirable.
Yet the tide is changing. Not only is the BoE going to hike rates, it is also about to end two funding programmes – the Funding for Lending Scheme (FLS) and Term Funding Scheme (TFS) that it introduced since 2012 to help transmit lower interest rates down the loan supply chain. Moody’s recently estimated UK banks will see increased interest expenses of £803m following the end of the schemes, part of which could be passed on to business loan customers.
The last few years’ growth in commercial lending, for all segments, came on the back of a benign interest rate environment. But things look like they might change very soon. When SMEs see their facilities’ repayment cost hike, asset finance may increasingly become a very interesting proposition. It is up to lessors to grasp the chance for business switch.