By Tristan Watkins, CEO, BNP Paribas Leasing Solutions UK
The latest figures from the Finance & Leasing Association (FLA) reveal that asset finance deals, comprised primarily of leasing and hire purchase, grew by 5% in 2016. This is the sixth consecutive year of growth and much of it was driven by new business in the commercial vehicle sector, which increased by 7% in 2016.
In today’s uncertain economy, small businesses, such as plumbers and delivery companies, are under increased pressure to stay competitive in a fast-moving market, yet many don’t have the funds to purchase essential business equipment upfront. As a result, commercial vehicle finance is proving an increasingly popular route for small businesses looking to replace or upgrade their vans, rather than an upfront purchase.
According to the Society of Motor Manufacturers and Traders (SMMT), more vans are hitting the road in Britain than ever before, driving the demand for finance. A record number of vans and pick-ups were registered in 2016, totalling 375,687 and marking the fourth consecutive year of growth.
The ecommerce boom is one factor behind this growth, leading to ever larger numbers of vehicles on the road. Changing shopping habits combined with increased consumer expectations around next-day and even same-day delivery, mean that delivery companies are looking to expand their fleets.
The UK ecommerce market is the biggest in Europe, and the third strongest worldwide. So far this year, UK ecommerce sales rose 12% year-on-year in January, suggesting that the sector’s success is set to continue despite concerns over the devaluation of the pound.
Another factor in play is the increased number of people setting up their own businesses, particularly builders and related trades. These self-employed sole traders are behind increased demand for new vans and, given tight budgets and cash flow worries, they are even more likely to look to finance to help them obtain the best van for their business.
Most businesses secure finance directly, according to the FLA, whilst sales finance through a dealer or reseller is the second most popular channel. However, more and more businesses are turning to brokers to introduce them to the right finance, with a 10% increase in this channel in 2016.
Brokers can play a key part in matching small businesses with the right finance for their business and the most recent data from the British Vehicle Rental and Leasing Association (BVRLA) reveals that leasing brokers’ combined car and van volumes grew by 11% since the end of 2015.
Hire purchase vs. finance lease
The FLA reported recently that UK consumers are turning their back on hire purchase (HP) and instead choosing to lease their vehicles, with hire purchase falling in value by 15% in 2016. It’s likely that this trend will be reflected in small businesses’ purchasing habits.
With HP, the monthly repayments tend to be much higher, and the customer doesn’t have the option of spreading the VAT across the length of the contract. For those that aren’t VAT-registered, this cost can be prohibitive. A finance lease on the other hand has a low upfront cost as it allows small businesses to spread the cost of the VAT. This is a significant benefit for non-VAT registered businesses allowing them to preserve valuable cash reserves for essential investment in order to make money or expand operations.
Ultimately, budget considerations are critical, especially for small businesses with limited capital. Low monthly payments are often more appealing to cash-strapped businesses than an upfront lump sum.
The right finance can overcome cost objections and help build better, longer lasting relationships between customers, dealers and brokers. Boosting small businesses is key to boosting the wider economy as SMEs account for 99% of companies in the UK, and generate a huge 47% of the country’s revenue. Leasing can help these businesses access the assets they need to succeed, and it’s likely that demand for flexible finance will continue to grow within this market.
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