Asset finance: 2024’s key challenges and opportunities

Steve Taplin, Managing Director at Lendscape discusses the challenges and opportunities facing the UK asset finance industry as we enter 2024, from a tougher economic climate, increased risk and high energy costs to key growth opportunities from the green transition, technological advances, and new markets and product offerings.

2023 was a banner year for asset finance. According to the Finance & Leasing Association (FLA) total asset finance new business in the ten months to October 2023 was 14% higher than in the same period in 2022¹. Overall, the Association added that it expected to see the sector attract new business revenues in excess of £38bn by the end of the year.

Will 2024 be the same? Or will Britain’s long-gestating economic challenges finally bring about a slowdown? While it’s impossible to say for sure, I do believe that we can make some relatively confident assumptions about the fate of the asset finance market over the 12 months ahead.

Let’s begin by covering off some of the likely obstacles, and then move into more optimistic territory with a look at some of the key growth opportunities.

Challenges

i. A tougher economy

Where else to start? In its November forecast, the Office for Budget Responsibility posited the risk of “a fall in business investment in the near term”, with the UK economy shifting from “a period of excess demand to a period of excess supply”². That alone could be enough to dampen demand for asset finance, even before we take inflation into account.

At present, optimism around the latter issue seems to be high, and although inflation rose unexpectedly recently, some parties are forecasting that inflation will fall to 2% by April³. Even then, interest rates are not expected to fall much below 4% before the end of the year⁴, still a far cry from the sub-percent average of the past decade⁵. Lower lending volumes – and tighter margins – may well be the result.

That said, ambitious businesses will still be looking to grow, and asset finance will continue to offer a route through which they can do so. Smart providers will use technology to help them reinforce the value that asset finance can deliver, creating better and more engaging services while simultaneously streamlining their own operations.

ii. A more complex risk environment

One in every 191 companies went into liquidation in the 12 months leading up to Q3 2023⁶. In total, UK insolvency rates are at their highest for more than a decade, the figures now beginning to approach those seen during the crash of the late 2000s⁷. For asset finance providers, the clear danger here is a resultant rise in the number of defaults and write-offs.

To navigate this environment, providers will need to take a range of mitigatory steps. As well as pricing and structuring deals appropriately for the level of risk involved, they’ll also need to implement more stringent monitoring and prediction protocols. The focus here should be on risk-focused analytics, and integrations with data sources capable of providing up-to-the-minute customer intelligence.

While prevention is always better than cure, of course, defaults will inevitably occur. When they do, providers will need to adopt a stratified approach to collections – combining tech-driven automation with human intelligence in order to ensure that they are prioritising the most urgent cases for recovery.

iii. Higher than usual energy costs

As with interest rates, energy costs are generally expected to fall during 2024, mainly as a result of decreases in the prices of wholesale energy⁸. Once again, though, the anticipated drop is unlikely to be steep enough to take us back to pre-pandemic prices. As a result, energy-hungry businesses will continue to be burdened with higher than usual costs, further reducing their appetite for asset finance.

While this will create clear challenges for sector-specific providers, it will also present opportunities. Those that can add genuine value to their proposition – either by improving their level of service or acting as a guide through these challenging times – will have a stronger chance of winning and retaining custom. Better integration with industry data sources (such as market comparatives) will hold the key.

Opportunities

i. The continuing green transition

Environmental responsibility isn’t just an issue for large corporations anymore; small businesses generate around half of the UK’s total carbon emissions, after all⁹. What’s more, with newly founded organisations like the UK Business Climate Hub offering dedicated support for SMEs on the path to net zero¹⁰, the green transition should continue to gather pace during 2024.

As it does, funding will be required for green assets like electric vehicles, renewable technologies, and energy-efficient machinery. That will create a clear opportunity in itself, but for those providers that can get down to granular, asset-level data, even greater returns await. In some instances, electric batteries can last longer than the cars they power, for example – creating targeted opportunities from a structuring perspective – and knowledge of innovative secondary use markets can equally reap rewards.

ii. Technological advances

While there’s still a very fine line between genuine potential and unfounded hype around artificial intelligence (AI), when used well it can undoubtedly help providers to streamline processes, improve their risk assessment capabilities, and create better, more tailored asset finance products (something that we cover in depth in one of our recent whitepapers).

To enable the “Level 4” application of AI (the point at which it can be used to augment core Asset Finance processes, referenced in the above-mentioned paper), providers first need to structure their data effectively. AI works best when dealing with well-organised, curated data, making it critical to have a system of record in place that can facilitate that kind of analysis.

Even without adding AI into the equation, an efficient and well-structured data store will inevitably empower richer and deeper data analytics, too.

iii. Small wins

Necessity is the mother of all invention… or should that be innovation? While larger businesses may start to hunker down in the face of adverse economic headwinds, smaller enterprises are unlikely to have that luxury. As a result, while asset finance providers might find fewer opportunities at the larger end of the scale, smaller clients may provide abundant growth opportunities in the coming months.

Different sized companies have different needs, of course. There’s no one-size-fits-all approach to asset finance, and the latent innovation of SMEs needs to be matched by providers. To do so, they’ll need an underlying platform that gives them the agility to tailor propositions around unique needs – delivering better pricing, better structuring, and better operations in the process.

iv. Diversification

Building on the above, providers will also find opportunity by branching into new markets and customer segments – and developing new product offerings in kind. By doing so, they won’t just be spreading their risk; they’ll be setting themselves up to capitalise on emerging opportunities, too. Good business will always be good business, wherever it happens to be.

Again, flexibility and agility will be crucial. The process of entering into a new segment, adapting to the needs of that subvertical or market, and integrating with new partners can’t happen without an appropriately powerful underlying technology platform.

Overall, it’s likely that the asset finance industry in the UK faces a more challenging year than it has in some time. By navigating the major hurdles, though – and embracing new opportunities – adaptable and innovative players will still find plenty of space for growth and success.

Notes:

1. Asset finance new business grew by 11% in October 2023 – Finance & Leasing Association, 7 December 2023
2. Economic and fiscal outlook, November 2023 – Office for Budget Responsibility, 22nd November 2023
3. Bank of England may cut interest rate sooner after surprise inflation forecast – The Guardian, 11th January 2024
4. What is the outlook for interest rates in 2024? – Fidelity International, 5th January 2024
5. Official Bank Rate history – Bank of England Database
6. Company insolvency statistics, Q3 2023 – The Gazette
7. Commentary – Company Insolvency Statistics July to September 2023 – gov.uk
8. Third-party energy costs in 2024 – Energy Live News, 26th October 2023
9. Small businesses and the transition to net zero – British Business Bank
10. New UK climate hub to support SMEs with the green transition – Institute of Export, 15th August 2023