How clients are managing cash flow

Jamie Chaplin, Sales Director at Renaissance Asset Finance (RAF), discusses how SMEs are utilising asset finance to maintain or increase cash flow and delves into the primary uses for RAF’s asset finance solutions by their commercial clients.

Asset finance is increasingly utilised by companies, particularly SMEs, to manage cash flow. Its popularity has coincided with the reduced access to finance for SMEs, with the FCA reporting that many SMEs remain risk-averse and lack enough internal funds to invest, with credit either too expensive or posing unreasonable terms.

New figures released by the Finance & Leasing Association (FLA) show that total asset finance new business in March 2024 reached £3.8 billion, the third highest monthly total on record, with only March 2019 and March 2023 seeing higher levels. In Q1 2024 as a whole, new business was at a similar level to Q1 2023.

In line with this trend, we are experiencing an increase in enquiries from brokers whose clients are considering utilising asset finance to maintain or increase cash flow. Digging a little deeper, we have identified the three primary uses for our asset finance solutions by our commercial clients.

Capital to deploy

While recent numbers from the Office for National Statistics show that the UK is out of recession, the cost of borrowing remains relatively high and pressure on operating margins remains. Due to these factors, clients still want to strengthen their financial stability and cash flow.

As a direct correlation, we have seen an uptick in refinancing requests. Refinancing, commonly known as ‘sale and hire purchase back’, allows businesses to raise cash from assets they already own. It is a way for them to remedy their cash flow with a release of equity.

Construction and haulage industries, where rising operational costs after the end of the super-deduction allowance have seen the industry stagnate, have looked to refinance assets to unlock working capital to inject into their cash flow without impacting the asset’s output.

The taxi sector has also fluctuated since the start of the year. There has been strong demand for refinancing balloon payments on taxis as clients prefer holding onto the asset instead of a part exchange for a new taxi. Licensed taxi-hire companies have been pushed by recent legislation to move their fleet towards being entirely electric by 2033. Moreover, with cost constraints and reduced grants, these firms often look to refinance new and old stock to leverage the value of their cash-generating assets.

The optimisation of financial structures within companies through refinancing assets reflects a broader strategy of caution in a relatively uncertain economic landscape while preparing for future growth opportunities.

Credit request

We are servicing more queries from independent finance houses who are seeking block discounting and wholesale products that will enable them to grow their business. Block discounting is a way to raise funds against a future income stream, and these providers need the finance to leverage and expand their operations as more customers come to them due to the economic climate and general credit appetite.

Block discounting is a flexible alternative to a credit line, which may be more sensitive to rises in interest rates. It also allows the finance house and its shareholders to build an annuity/pension fund. Wholesale essentially does the same thing, but the security structure is a loan and charge (debenture) over the borrower. Agreements funded, for example, can be either regulated and/or unregulated; finance lease/HP; sale and leaseback; unsecured; and/or facilities secured on a variety of underlying identifiable assets.

Remaining liquid

Businesses are opting for hire purchases when acquiring certain assets, whether they are business-critical or not – such as luxury cars for their executive team. They want to remain liquid, so fixed monthly payments, which are not affected by interest rate rises, allow these businesses to manage cash flow and retain excess cash.

As the economic outlook shows no sign of rapidly improving, asset finance remains vital to the operational capacity and financial health of SMEs and HNWIs. We also urge brokers to keep it in mind when discussing products to maintain and increase cash flow with their clients; it is a credible solution for many scenarios.