Asset finance could have a big role to play in the future of UK SMEs

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Asset finance could have a big role to play in the future of UK SMEs

Small and medium enterprise (SME) businesses have faced their biggest ever challenge this year. Mark Johnson, managing director of business finance broker Johnson Reed, says there are ways in which asset finance can help them to continue to compete, both as asset vendors/suppliers and end user clients.* Mark is a long-term supporter and promoter of small businesses with over 20 years in the asset finance industry. Throughout his career, he has set about changing how lenders work by challenging banks and adopting a ‘common-sense lending’ approach, which has proved popular with a variety of businesses for asset & loan facilities; including many in the indoor-play and wider FEC industries.

The role of the finance broker has grown in recent years, he says, with increased responsibility and trust from lenders wishing to deliver suitable matches and customers to meet their specific needs. It has also been a time where a common-sense approach has helped Johnson Reed start, grow and develop a large number of businesses that perhaps weren’t of interest to the mainstream banks.

This year in particular, although mainstream banks have supported small businesses with Bounce Back Loans, as usual, a majority of SMEs have found themselves financially stranded with everything that has affected trade.

“In a time when businesses have had their premises shut with no choice but to close, and then are faced with restricted and limited numbers when open, these business owners must look to hold on to cash where possible and look to alternative funding to help deliver high standards of trading,” Mark says.

“By financing assets, or re-financing assets, businesses can steady their cash flow stream and invest in the long-term revenue stream of the business, rather than being faced with overwhelming bills with no other option when forced to close or during tough periods.

Having cash saved and ready to use in these emergency situations is an option that businesses must take advantage of in order to continue on working, he explains.

“This is where the responsibility falls to alternative lending,” Mark says. “But our industry must continue to do its due diligence in securing finance for our clients.

“All too often I am hearing about businesses taking on loans, such as CBILS, to paper over cracks, clients that are forced to take it, and spend on existing debts, creating ‘bad debt’.”

Suppliers must be aware of the impact and benefit of being able to provide this option to operators, as it heads towards becoming the new norm. “Our industry has to ask the right questions to ensure financial products are suitable for clients and encourage them to invest in the business to increase revenue or decrease costs, as such schemes and finance are intended.

“Suppliers that adapt will find themselves better off in the long run, alongside businesses that see the benefits too,” Mark says.

Good and bad debt

Getting that right creates ‘good debt’, which allows companies to continue trading and moving forward. It is crucial to understand and distinguish between the different types of debt, why some can be beneficial to your business and its operations, and why some can be harmful to your long term finances, cash flow and objectives. It is inevitable that any business will take on debt, and this isn’t a bad thing, provided the debt is used in a positive way to improve your business.

Good debt is any type of finance that invests in the future of your business, helps to increase revenue, decrease costs or both can be considered good debt. It is helping you to make money, protect the cash you have and keep trading or expanding without being a burden on your cash flow.

For example, an indoor-play centre requires kit; without it, your business wouldn’t be able to function and therefore customers wouldn’t continue to come through the doors. So by using finance, leasing or a loan to invest in that kit, you are creating a good debt.

Examples of good debt include:

Bad debt is traditionally short-term, papers over cracks and offers no sustainability for your company. It puts pressure on bottom line figures, which is where debt can build up. If debt is secured with the aim of paying existing bills, overheads, wages, etc. then it is only going to put pressure on the business. Loans to pay debt or bills can be classed as bad debt as it has no positive contribution to the revenue and paying back such debts will put a strain on cash flow. It is important to question the contribution and reason behind taking finance, and how it can impact your business.

When taking on debt, ask yourselves these questions:

  • Does it make your business money?
  • Will the debt make more money than it costs to borrow?
  • Does it help retain cash or decrease costs?
  • Is it a long-term solution?

If you’re in two minds about taking a loan, finance or leasing, then take the time to consider whether it is the smart choice. “If loans are doing what they are designed to do, they help and support small businesses and it is imperative that now more than ever we ensure we are on the correct side of this,” Mark adds. “It is vital that as we move into 2021 companies consider alternative finance providers to support their businesses where banks are less open to support than ever, and there is a clear path for SME businesses to choose.”

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Swim, don’t sink

Small businesses have historically faced barriers to accessing funds, he admits, such as loan applications that can take up to 25 hours of company time.” Our industry is already looking to more efficient ways of creating and speeding up applications, using technology and working with lenders to ensure a fair and faster process.

There is opportunity for businesses that want to invest, grow, keep hold of cash and ride this storm, he insists. “Our commitment as brokers and lenders, including us at Johnson Reed, must be to protecting the best interests of these businesses, ensuring that any finance or schemes are going to generate revenue and decrease costs and if businesses can keep trading through products bought using asset, lease or equipment finance, then SME companies have the opportunity to keep afloat and keep moving, rather than standing still or sinking."

The views and opinions expressed in this article do not necessarily reflect the views of Morton Michel.