Asset classes pioneering new funding mechanisms in equipment finance

The UK equipment finance industry has faced a notable decline in new finance deals. In the first half of 2024 the value of new deals dropped by 14% compared to the same period in 2023. The looming threat of a recession, economic uncertainty and concerns around the impact of the General Election on interest rates have all played a part in hampering growth in the sector.

And yet it is through this adversity that we are now seeing the emergence of new and innovative funding mechanisms that cater to businesses that are weary of financial instability.

These innovative mechanisms are not just reactive; they are transformative, paving the way for a more flexible and responsive approach to financing equipment. Among the various models gaining traction, pay-per-use arrangements, subscription models, and sustainable finance solutions stand out as pioneering approaches that align closely with contemporary business needs.

Understanding pay-per-use arrangements

Pay-per-use (PPU), also known as usage-based financing, represents a shift from traditional financing models that often require substantial upfront payments and long-term commitments. Instead, businesses pay only for the actual usage of the equipment, whether that be through hours of use, output produced, or other relevant metrics of performance.

In the agricultural industry, for example, there is a strong case for PPU models in the financing of specialist or seasonal equipment, where sprayers or harvesters are needed for very specific periods of time. Farmers are able to predict when they need to use this equipment and plan for short term financing accordingly. Whereas, in manufacturing, the ability to upgrade to the latest state of the art tooling and equipment leads to greater outputs and potentially minimises the cost of production.

This model also allows for better cash flow management by freeing up capital to invest in growth initiatives instead of being tied up in depreciating assets. Overall PPU is an effective finance method for achieving significant efficiency gains, optimising resource utilisation, and reducing upfront costs for businesses.

Pay-per-use in action

Pay-per-use financing solutions can be tailored across industries and equipment types, facilitating diverse payment structures using the latest technological advancements and sustainable business models. This financing approach offers businesses potential off-balance sheet treatment, aligning equipment costs directly with revenue generation to improve financial flexibility. By leveraging data and analytics, organisations can allocate assets more efficiently, preserving capital for other uses, such as acquisitions or resource allocation.

A recent article from Finativ discusses the growing demand for pay-per-use contracts in the asset finance market. It highlights how smart technologies like IoT sensors are increasingly being integrated into vehicles and industrial equipment to transmit real-time data to manufacturers and finance providers. This data drives the variable pay-per-use element of the finance contract and provides valuable insights into operational efficiency and asset performance.

Another significant advantage of pay-per-use arrangements is the adaptability they offer in rapidly changing market conditions. Companies can scale their equipment usage up or down based on demand fluctuations without the burden of long-term financial commitments. For instance, a construction firm can easily adjust its equipment needs during a project’s peak demands, significantly optimising operational efficiency and resource usage.

The predictability of subscription models

The new age of equipment finance has also led to the invention of subscription models. An increasingly popular financing method similar to pay-per-use, subscription models offer fixed payment terms but come with additional services such as maintenance, insurance, and upgrades, providing a comprehensive solution.

Subscription models offer scalability, enabling businesses to easily adjust their subscriptions to match their growth or seasonal demands. They also help mitigate the risks associated with owning and maintaining equipment, as the responsibility for upkeep often lies with the provider.

Construction, industrial manufacturing and healthcare are areas that are benefiting the most from subscription-based equipment finance. For example, hospitals can lease equipment like MRI machines in containerised setups, ready for immediate use along with necessary office space. This method not only alleviates the need for substantial upfront investment but also allows hospitals to efficiently manage patient backlogs as needed.

Subscription models in equipment finance offer a modern, flexible approach that aligns well with the dynamic needs of many industries. By providing businesses with access to essential equipment without the burden of outright purchases, these models foster financial agility while allowing for a streamlined operational focus.

Enhanced financial planning

One of the key benefits of subscription models is improved financial predictability. Businesses can budget more effectively with fixed monthly payments, which leads to better cash flow management. This stability is particularly advantageous for small to medium-sized enterprises (SMEs) that may struggle with large, upfront capital expenditures. Knowing exactly how much to allocate each month can help businesses plan their finances better, reducing stress and uncertainty.

Moreover, subscription models often come with tailored packages that can accommodate varying levels of usage based on the specific needs of a business. This flexibility means that enterprises can opt for a model that reflects their operational demands without the fear of overcommitting financially. When the requirement for equipment fluctuates, businesses can simply adjust their subscription levels rather than facing the daunting prospect of idle machinery that entails sunk costs.

Another significant advantage of subscription models is the opportunity they present for innovation. By removing the burden of upfront costs, businesses can allocate more resources toward research and development or the adoption of new technologies. This financial freedom encourages companies to experiment with new methodologies and processes, enabling them to stay competitive in a rapidly evolving market.

Mobilising green investment in equipment finance

As the world gravitates towards sustainability, the equipment finance sector is no exception to changes in the status quo. Companies are increasingly seeking financing options that align with their sustainability objectives, prompting financiers to tailor solutions that facilitate green initiatives.

Many organisations are now opting for energy-efficient or eco-friendly equipment, such as electric vehicles or solar-powered machinery, specifically under PPU arrangements. This approach not only reduces their carbon footprint but also alleviates the upfront costs typically associated with purchasing sustainable equipment. By paying only for what they use, businesses can seamlessly integrate environmentally friendly assets into their operations without the financial strain of ownership.

In a recent Asset Finance Connect webinar sponsored by Lendscape, the panel (comprised of experts such as Oliver Hedl, Chris Lillico and Steve Taplin among others) discussed the topic of turning PPU into a reality to fund future manufacturing.

Günter Hehenfelder, CEO & Founder of Findustrial, kicked off the discussion by describing their vision of the “factory of the future” which showcased various ways in which a PPU model would be effective to finance sustainable equipment such as “solar-as-a-service”, “pay-per-mile” for electric truck fleets, and “charge & pay for e-charging stations.

He noted that there are a lot of sophisticated “equipment-as-a-service” offerings from manufacturers where products are bundled with services and customers mainly pay for the performance or the outcome and not the equipment itself anymore. “In the e-mobility sector I’m convinced we will see more of these business models in the future which, and this is good news for the funders, will require a lot of refinancing in the background”, he said.

This shift towards performance-based financing arrangements resonates well with the changing landscape of equipment finance, where traditional ownership models are giving way to more flexible and innovative agreements. As businesses adopt these pay-per-use models, they are not just gaining cost efficiencies but are also encouraging a culture of sustainability within their corporate frameworks.

Lenders are also incentivising the adoption of sustainable practices by providing reduced rates or incentives for equipment that meets certain green criteria. This symbiotic relationship encourages environmental consciousness within industries such as construction, manufacturing, and logistics, where heavy reliance on machinery often leads to increased emissions.

The UK green finance growth opportunity

As the UK government commits to achieving net-zero emissions by 2050, the demand for green finance solutions, including pay-per-use arrangements in equipment finance, is likely to surge. This presents a significant growth opportunity for lenders, enabling them to meet the evolving needs of businesses striving to incorporate sustainability into their operations.

With the introduction of legislation aimed at reducing carbon footprints and promoting greener practices, businesses are looking for flexible financing options that can adapt to their changing requirements. Pay-per-use arrangements are particularly appealing in this context. By facilitating access to electric vehicles, energy-efficient HVAC systems, and other green technologies, equipment finance providers can play a crucial role in helping businesses transition to a sustainable model more effectively.

Innovation in financing structures can further enhance this growth opportunity. For example, lenders may explore developing portfolios of green assets specifically designed for pay-per-use arrangements. Moreover, public and private sectors can collaborate through initiatives such as tax incentives or grants for businesses seeking to implement sustainable practices. By creating financial environments where green technologies are both accessible and affordable, the UK can position itself as a leader in sustainable equipment finance.

UK green finance progress so far

The progress made in the UK towards integrating green finance into the equipment finance sector is commendable. Over recent years, there has been a concerted effort from both the public and private sectors to promote sustainable financing solutions. Local authorities, banks, and financial institutions are increasingly recognising the importance of sustainability and have begun to tailor their offerings to meet this emerging demand.

One notable initiative is the Green Finance Strategy launched by the UK government, which aims to align private sector financial flows with clean, sustainable growth. This initiative has led to the creation of numerous platforms and financial products designed to support businesses in their environmental goals. As part of this strategy, the UK has seen an increase in funding for clean technology companies, which bodes well for the adoption of sustainable finance practices.

Additionally, various financial institutions have introduced green bonds and sustainability-linked loans, specifically targeting businesses that commit to environmental criteria. These instruments are designed to incentivise sustainable practices through favourable terms and conditions, effectively rewarding companies that succeed in reducing their carbon emissions or improving their energy efficiency. The uptake of such financing products has demonstrated a marked increase, as businesses seek to leverage investments that align with both their financial goals and their environmental responsibilities.

Engagement from regulatory bodies further strengthens the green finance agenda. The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have issued guidelines encouraging firms to incorporate sustainability risks into their decision-making processes. This move not only promotes transparency but also fosters a culture where sustainability is a primary consideration in financial strategies, paving the way for a more robust equipment finance landscape.

The role of talent in an evolving landscape

A successful transition to innovative funding methods hinges on the expertise and commitment of skilled professionals across various levels of the industry. With technology playing an integral role in monitoring equipment usage, individuals adept in tech-driven solutions are essential to develop and maintain systems.

With a dedicated talent partner, companies are able to attract, capture and onboard exceptional resources, key technical specialists, managers and business leaders. By recognising the critical importance of adapting to technological advancements and shifting market dynamics, comprehensive talent solutions ensure that organisations are equipped with forward-thinking leaders adept at navigating these changes.

The road ahead

As the UK moves forward, it is imperative for financial institutions to continue developing tailored products that cater to the unique needs of businesses operating in various sectors. The evolution of funding mechanisms offers a dynamic solution that not only addresses the financial constraints faced by companies but also aligns with broader economic and environmental goals.

By embracing finance arrangements such as pay-per-use or subscription-based models, companies can optimise their operational costs while simultaneously reducing waste and ensuring they only pay for what they actually need. This aligns with the growing emphasis on circular economy principles, where resources are used efficiently and responsibly. With a strong backing from regulatory bodies and an increasing demand for innovative financial solutions, these arrangements are carving out a vital niche within the equipment finance sector.

Furthermore, the intersection with green finance agreements enhances the potential for businesses to invest in more environmentally friendly equipment. As technology advances, firms can adopt the latest sustainable equipment more readily and ensure they remain competitive without the burdens of ownership. This creates a compelling narrative where financial and environmental goals are interlinked, setting a precedent for how businesses approach equipment financing in the future.