With personal and professional lives turned on their heads this year, I think we can all agree that our joint ambition in 2021 should be one of reimagining and rebuilding so that we can come out of this pandemic stronger than we went in.
Now, there won’t be many analysts brave enough to make predictions – and I’m not going to be bucking that trend. However, signs are already emerging of themes that I believe will shape asset finance in 2021, and lay foundations for the market for years to come.
Here’s my top five.
1. Advisers and brokers will become ever more indispensable
Professional advice is going to play a key role in supporting small and medium-sized businesses over the next twelve months. Financial products are becoming more complex as central policy makers introduce government support and grant schemes in response to the pandemic. And, with social distancing regulations, stop/start conditions of trading within tiers, and continued foreign trade uncertainty added into the mix, managing a business has never been more challenging.
One thing’s for sure. If business owners didn’t previously have time to get their heads around the T&Cs of hire purchase, finance lease and contract hire agreements – not to mention the different exit penalties, flexibility and forbearance terms each one carries – they certainly don’t now.
Therefore, without guidance from brokers or advisers, many SME owners may find themselves choosing the wrong products that could have serious long-term consequences for their business. Or alternatively, miss out on the opportunities for growth that asset finance offers altogether.
As a result, more than ever before, SMEs are going to need access to someone that knows the products and providers, understands their industry, and can advise on the most appropriate funding line for their business. Without this support, recovery from the pandemic is going to be a bumpy ride.
2. SME-lender relationships will drive the speed of the recovery
SMEs are going to be the green shoots of the UK’s emergence from this pandemic, and how quickly we bounce back will depend on their access to capital. However, in times of turbulence, the reaction of lenders is often to tighten their appetite for lending and demand more financial information from SMEs looking to borrow.
At the same time, even some of the healthiest businesses in the UK will have had their top line battered by the pandemic. It’s temporarily rendered the use of historic credit rating agencies to assess a business’s propensity to repay as riskier for a potential lender.
Instead, in 2021, lenders are going to have to move to a more projection-led assessment, looking past the numbers to make forward-looking decisions that consider a how a business will fare in a post-pandemic world.
Strong efforts are needed from both SMEs and banks to improve lines of communication, share information and boost collaboration. Banks have to provide more clarity about what financial information they expect from potential borrowers. While small business owners should make sure it’s easy for lenders to understand their current trading performance, especially with the added burdens many will endure when payment holidays end in 2021. Perhaps just as importantly, SME owners must learn how to tell a strong story about their business, how they’re going to be able to repay the debt, and how they will survive/thrive through the pandemic.
Again, brokers will have an important role to play in facilitating this.
3. Businesses will be forced to look beyond their existing finance providers
This economic downturn is likely to result in several of the traditional providers curbing their lending in some sectors to mitigate concentration concerns. Many SMEs may find their existing provider is simply unable – or unwilling – to lend any more, even if they are a perfectly creditworthy business. This could undermine strong, and to this point exclusive, relationships many SMEs have with their banks, leading them to look elsewhere for additional finance.
It creates an opportunity. Not just for new banks like Allica that have don’t have an under-pressure back-book of loans – but also for brokers, who will find a wave of SMEs entering the market looking for a new provider.
Brokers being able to advise on a broad suite of products – rather than specialising in just one area – will therefore be critical to ensure their clients are finding the best solutions. CBILS has shown the speed and success with which the market can diversify if it needs to. And banks have to ensure they’re providing brokers with the tools they need to do the same with asset finance and commercial mortgages. This means developing simple and straightforward products, and a proposition that easily allows brokers to supply both.
4. Brexit will lead to a rise in demand for finance from SMEs as production is potentially re-shored to the UK
I suppose I had to mention the B word eventually.
At the time of writing, there are of course still big questions around how Britain’s future trading relationships with international markets will look in practice. However, regardless of the outcome, large and mid-sized corporates are likely to look again at their supply chains for opportunities to re-shore production in order to reduce risk and drive-up efficiency.
Where this proves to be desirable, there is going to be significant demand for investment to fund the manufacturing and logistics assets to make it a reality. The entire asset finance industry needs to be ready to service this demand and will play a key role in Britain making a success of its departure from the European Union.
5. Green finance will move from growth industry to the mainstream
Proactive regulation to encourage the take-up of sustainable transport has spurred SMEs’ uptake of green vehicle fleets faster than many would have imaged. I predict plenty more businesses will look to take advantage of the attractive incentives these solutions come with next year.
However, the complexity of these initiatives and the pace of technological and regulatory change will make it a challenge. Alongside choosing how to fund their fleet, SME owners will need to identify the right type of electric vehicle for their business needs. A regional courier, for example, might find the daily range of a vehicle to be of little concern. However, do their employees have access to infrastructure to keep them charged overnight?
Brokers and advisers that keep a comprehensive handle on new sustainability regulations, government initiatives and technological change will be in high demand in 2021.
The COVID pandemic will be to businesses as the global extinction event was to the dinosaurs. No matter how big you are, only those well-prepared and with the ability to adapt to the new conditions will be able to survive. That means leveraging market expertise, improving transparency and communication, and being more open to new providers and technology.
No doubt, as cash reserves become strained, there will be more bad news to come in 2021. However, it presents plenty of opportunity, too, for entrepreneurs and more nimble, smaller businesses to leverage their size and get ahead.
It won’t be easy, but if lenders, brokers/advisers, and SMEs remain optimistic, ambitious and continue to work together, I am confident the UK can end 2021 far stronger than it went in.