Lloyds Bank Commercial Finance: asset finance in the age of austerity

In recent years many businesses have turned to alternative sources of funding as traditional bank lending retrenched. Now, even as banks increase their lending activity, solutions such as asset finance remain popular. Finance Director Europe spoke to Gordon Ferguson and Patrick Sherrington of Lloyds Bank Commercial Finance about its benefits for both small and big businesses.

In tough times for the economy, companies still need funding to pursue market opportunities and foster growth. Incentives such as the UK Government's Funding for Lending Scheme and regional growth funds are encouraging businesses to seek credit, and banks are offering a broader range of tools to help their clients. One of these tools is asset finance, where there continues to be significant growth.

"Asset finance has seen double-digit growth in the sector of the market I deal with during the last three years," says Gordon Ferguson, head of hire purchase and leasing at Lloyds Bank Commercial Finance. "We have seen exponential growth in sectors like agriculture, which has a lot of equipment against which we can fund, but there are many industries that have the right assets, from cranes to printing equipment. There is a wide range of assets that can be funded.

"The principal benefits have never changed. Asset finance benefits working capital and existing funding lines are not affected. It spreads the cost of the asset over its useful life. Now, asset finance offers probably the lowest cost of funds ever on the market," he adds.

Ferguson's team provides asset finance solutions for small and mid-market businesses with turnover up to £100 million, lending against vehicles and a wide range of business assets such as machine tools, and engineering, printing and construction equipment. His colleague Patrick Sherrington, who heads the bank's Corporate Asset Finance team, focuses on larger enterprises, which can also benefit greatly from asset finance.

"In the mid-cap to global corporate space there are many different needs and propensities to use asset finance products," Sherrington remarks. "Large corporates have access to different credit instruments, depending on their credit ratings. AAA-rated companies may find liquidity in the bond market, but for A-rated or BBB companies asset finance is an important tool in the FD's kitbag.

"It is often used at a subsidiary level. For instance, if a US company has a UK subsidiary, it might use asset finance as a local solution rather than bring over group funds from the US, which would be costly to repatriate. Operational lease or residual value lease solutions also allow a company to transfer the risk in the value of the asset at the end of the lease, therefore lowering the value risk and total cost of ownership in the asset," he adds.

Funding growth

For an example of operating lease finance, take a supermarket chain that needs trucks for its logistics operations. It could lease trucks for three years, at the end of which, the asset finance company takes the risk of passing them on to the secondary market.

"Trucks are not part of a supermarket's core business," says Sherrington. "Also, this kind of deal gets companies to look closer at replacement discipline. Our customers benefit from risk transfer at the end of a lease and have an accessible, low-cost solution in terms of execution compared with alternatives such as securitisation."

"Now, asset finance offers probably the lowest cost of funds ever on the market."

It is true that new regulations could dramatically change the rules for operating leases by bringing the vast majority onto the balance sheet, though Sherrington remains sceptical of whether the rules will be adopted in their current form.

"There is not a lot of clarity about the rules," he says. "At the moment, every car lease could appear on a lessee's balance sheet, which would have huge implications on the presentation of financials. We will have to see if the rules get published or whether they are deferred again."

At present, financing against leases is an extremely flexible option. For instance, a company contracted to deliver a service that requires equipment - notably IT assets - can be funded against the embedded payment flows over the life of a contract. The fee that is paid in return for the investment that makes the service available, on top of which an additional service fee is paid, can be treated as an embedded lease.

In short, asset finance is a versatile tool, and it brings many advantages over straight bank debt.

"Asset finance can improve financial metrics like earnings or return on capital by getting assets off the balance sheet, and it enables companies to match cash investments to the life of the machinery they buy," notes Sherrington. "Also, it builds a relationship between banks and FDs because they generally want a portfolio of products with the customer and, therefore, focus on a deeper relationship."

Building relationships

To a great extent it is the capacity for banks to focus on relationships that defines their capability in the asset finance space.

"We do mainly hire purchase, though we also do leasing deals," says Ferguson. "We look at whether the customer can repay the loan and we look at the asset itself, taking into account key factors such as depreciation. But the most important factor is our relationship with the customer. People think of asset finance as secured lending, but sometimes there is an asset gap as the loan amortises, which means part of the loan is unsecured, and sometimes the loan will be totally unsecured. The relationship allows us to fund a business in the long term because the deal is based on trust.

"We ask our customers what they are buying and why, and want to know what they will do with the asset. So, we get to understand their business before starting the credit process. FDs should look for a bank that wants to form a long-term relationship, and which can deliver. Good customer service and good execution are vital; they need a bank that pays out for an asset on time. Asset finance deals usually happen quickly as the asset has often been bought by the customer before the finance piece is put in place," he adds.

The relationship aspect is as important to big businesses as it is to SMEs.

"FDs must choose a bank that is relationship-oriented," adds Sherrington. "Every bank says it is, but FDs can tell which ones really are. Asset finance is all about a relationship that lasts for the whole term of the deal. It is also important to choose a bank that has demonstrable expertise in what is a niche sector. Some overseas banks have pulled away from asset finance, so FDs should look for a knowledge base at a bank that is committed to the market."

Lloyds Bank Commercial Finance has a proven track record in asset finance, and this year has seen landmark deals that cement its presence in the market. A £300-million facility for Milestone Aviation - which enabled Bristow to expand its helicopter fleet - stands out, as does a £50-million operating lease deal for a passenger ferry that the bank arranged for a UK mid-cap client.

Such deals show a continued commitment to asset finance, which sets the bank apart from many of its competitors.

Gordon Ferguson, head of hire purchase and leasing at Lloyds Bank Commercial Finance.
Patrick Sherrington, head of the Corporate Asset Finance team at Lloyds Bank Commercial Finance.
Lloyds Bank Commercial Finance has witnessed exponential growth in asset finance in industry sectors such as agriculture.
Lloyds Bank Commercial Finance provided a £300-million facility to Milestone Aviation, which helped Bristow to expand its helicopter fleet.