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SME Leasing

The European Commission has initiated various reports on SMEs contribution to the EU economy. SMEs are the motor of the European economy, accounting for 99.8% of firms and 66.9% of employment in the EU-27 in 2010 (for more information see here). These reports have found that access to finance is currently considered one of the main problems for SMEs and constraints on their growth in Europe.

In order for SMEs to grow, access to affordable sources of finance is critical. The recession has made it more difficult for many SMEs to rely on internal sources of capital  (e.g. reserves of past profits) to finance investment. As SMEs have become more reliant on external sources of funding during the financial crisis, the leasing indsutry has supported SMEs by providing an attractive source of funding for investment. SMEs which can access external finance are more likely to be able to invest in the right equipment to contribute to economic recovery in Europe.

Against this background, the European Investment Bank (EIB) has recently had a capital injection and is keen on ensuring that as many European SMEs as possible are able to access financing. Therefore, European leasing companies now have a unique window of opportunity to explore ways of working together with the EIB to help finance European SMEs. Leaseurope and the EIB are collaborating to explore the possibilities for cooperation and have jointly written a fact sheet outlining the procedures and eligibility requirements for leasing companies to receive one of the EIB’s main financial products: the EIB Loan for SMEs. You can access this useful hand out here.

Benefits of Leasing for SMEs

With leasing representing 19% of all equipment investment at European level in 20091 , the leasing industry plays a key role in supporting the European economy and its recovery by enabling investment in business assets such as plant and machinery, vehicles, office technology, agricultural and construction equipment, medical equipment and renewable energy plants amongst many other assets.

Leasing is particularly attractive for SMEs with scarce financial resources because it provides them with the possibility to finance up to 100% of the purchase price of an asset, without having to offer any supplementary guarantees. Additionally,as lessors retain ownership of the leased asset, they can provide funding to businesses when other types of lenders cannot. The leasing industry is therefore particularly well placed to support SMEs with high growth potential and start-ups.

Lessees can better manage their working capital by spreading payments over the life of the asset and leasing enables them to use equipment without having to worry about considerations linked to ownership, such as second hand asset values or the disposal of the asset when it is no longer required. SMEs can opt for leases which cover all of their asset-related needs, for example services such as insurance and maintenance of the asset.

Leasing also offers businesses the flexibility to change their leased equipment at the end of the rental period, enabling them to upgrade to the latest and most energy efficient equipment.

1This "penetration rate" is calculated by taking new Leaseurope equipment leasing business as a proportion of European investment. Investment figures are taken from Eurostat. Source: Leaseurope 2009 Annual Survey.

European Data on SME Leasing

European Investment Fund on the Importance of Leasing for SME Finance:

In August 2012, the European Investment Fund (EIF) released a working paper on "The importance of leasing for SME finance”.

According to the EIF, this paper puts a spotlight on the importance of leasing as integral part of the tool-set for SME finance, also against the background of market weaknesses for SME lending. It explains the mechanics and logic of SME leasing and provides latest available market information. Furthermore, the paper explains in the form of three short case studies how SME leasing can be supported via credit enhancement/guarantee techniques.

This paper is the 15th issue of the EIF Working Paper Series on selected topics and studies in relation to EIF´s business.

To obtain a copy of the paper, please click here.

The Use of Leasing Amongst European SMEs:

In today's climate of poor European economic growth and high government debt, we can no longer look to public spending as the main driver of the European economy. Focus has fallen on SMEs, as significant contributors to European GDP, to provide a sustainable economic recovery.

This report demonstrates that leasing is a vital source of investment financing for SMEs and that promotion of this market would ensure that European SMEs can invest and expand more in the future. Given the current economic climate, leasing clearly has an important role to play in helping European SMEs and, in turn the European economy, on the path to full recovery.

The report was undertaken on behalf of Leaseurope by leading economic consultancy Oxford Economics with the support of Linedata. It is based on a survey conducted in July 2011 on the use of leasing amongst European SMEs. Just under 3,000 SMEs were interviewed across 9 industrial sectors and in 8 countries (Germany, France, UK, Italy, Spain, Netherlands, Poland and Sweden), which together account for 83% of total EU economic output and 78% of the European leasing market.

For more information on how to obtain the report please visit our dedicated SME report webpage.

European Central Bank Figures:

The European Central Bank regularly surveys firms in the Euro Area to monitor developments in firms’ access to finance. The most recent in this series was a survey of 7,510 firms in the Euro Area, of which 6,960 (i.e., 93%) were SMEs, conducted between October 2012 and March 2013.

Asset Finance Shows Slight Increase

Over the period between October 2012 and March 2013, the ECB's latest results show that 32.4% of Euro area SMEs used leasing, hire purchase and factoring. This figure shows a slight increase over the previous survey and increased at a simlar rate to bank loans (Figure 1).

In comparison, the ECB also surveyed large firms. 55% of large firms in the Euro area used leasing, hire purchase and factoring, which continues to be more than any other category of external financing (Figure 2).


To our knowledge, aside from Leaseurope's most recent publication, "The Use of Leasing Amongst European SMEs", there is very little other data on SMEs use of leasing available at European level. However, there is some research available at national level. Some of Leaseurope's Member Associations have undertaken studies in the past, examples of which are summarised below.

We intend to enrich this page as we investigate this topic further. If you are aware of relevant research or would like us to share information on this webpage, please contact Hayley McEwen.

Germany:

The leasing sector is Germany's biggest investor, providing new leasing volumes worth €43.6 billion in 2010.

In 2011, the German Leasing Association (BDL) conducted the market study “Leasing in German Companies“. The study included a detailed survey of 1,003 companies of sizes from 5 to 10,000 employees1.

Companies taking part in the study indicated that leasing is more important than traditional bank loans for financing investment and is therefore their preferred source of external funding. Overall, 34% of companies indicated that leasing is their preferred form of finance for an investment of €25,000. By comparison, fewer companies indicated credit (28%), hire purchase (25%) and renting (6%) to be their preferred form of finance.

The study focused on companies of all sizes in Germany (from 5 to 10,000 employees)2. The main findings in relation to the smaller firms, i.e. with 5-499 employees are the following:

Use of leasing

  • The results showed that leasing was considered for an investment decision by 76% of companies with 5-20 employees, 80 % of companies with 21-49 employees and 87% of companies with 50-499 employees.
  • Depending on company size, between 32% and 44% of leasing companies with 5-499 employees reported leasing as their preferred form of finance for an investment of up to €25,000.
Reasons for leasing
  • The most important reason for companies of all sizes to lease was the predictability and transparency of costs. 51% of leasing users felt this was extremely/very important.
  • The preservation of liquidity was the second most important reason for choosing leasing, especially for small and medium-sized companies. 48% of leasing users felt this was extremely/very important.
  • The preference of companies for equipment that is always up-to-date was the third most important reason for choosing leasing. 45% of leasing users felt this was extremely/very important. As the duration of leases is usually shorter than the useful life of equipment, this reduces the risk of equipment becoming obsolete.
  • The attractiveness of leasing is enhanced by the availability of complementary services. 67% of companies with 21-49 employees that use leasing consider the possibility to connect services with leases to be important. The most popular services are maintenance, repair and customer service.

1 The survey was conducted by TNS Infratest Finanzforschung which surveyed 1003 companies, of which 750 used leasing.

2 This study does not use the traditional definition of SMEs specified by the European Commission. Companies with 5-20 employees are considered as small firms, firms with 21-49 employees as middle-sized and firms with 50-499 employees as large enterprises, followed by very large enterprises with over 500 employees.

UK:

The Finance and Leasing Association (FLA) has supported various research studies on SMEs’ use of asset finance:

  • Recession effects on new equipment investment in SMEs , Open University Business School, March 2010
  • Asset Finance and SMEs, Open University Business School, March 2009.
  • Financng UK Small and Medium-sized Enterprises – The 2007 Survey, The Centre for Business Research, University of Cambridge, August 2008.
  • SMEs and Capital Investment, The Forum of Private Business, November 2005.
  • Finance for Small and Medium-Sized Enterprises – The 2004 UK Survey of SME Finance, Warwick Business School, University of Warwick.

In October 2010, the FLA commissioned ABA Limited to prepare case studies of how small companies are obtaining finance to fund new equipment. These case studies showed that some businesses had delayed investment because of the economic uncertainty. For many businesses, leasing using vendor finance was seen as a more straightforward way to fund new equipment than using conventional bank loans, helping to avoid the need to provide personal collateral, avoiding fees and generally with a competitive interest rate.

The 2005 study on SMEs and Capital Investment found that:

  • Overall, SMEs invested more in information communication technology (ICT) equipment than in any other asset class.
  • Nearly 44% of SMEs were not able to make capital investments because they could not afford it. Given such a high proportion of SMEs experiencing financial difficulties, asset finance, with its cash flow benefits, could be an attractive source of financing to bridge this gap.
  • SMEs used leasing as a means to finance investment frequently in some asset classes such as vehicles (i.e. cars and trucks), forklift trucks, photocopiers, telecoms and vending equipment.
  • Businesses spending up to £5,000 on capital investments preferred to use either cash or leasing/rental/hire purchase
  • For investments between £25,000 and £100,000, SMEs used leasing/rental/hire purchase as their main source of finance.

If you would like further details about any of the reports mentioned above please contact Research@fla.org.uk.

 

FLA Research
The FLA has supported various research studies on SMEs’ use of asset finance:
•Recession effects on new equipment investment in SMEs , Open University Business School, March 2010
•Asset Finance and SMEs, Open University Business School, March 2009.
•Financng UK Small and Medium-sized Enterprises – The 2007 Survey, The Centre for Business Research, University of Cambridge, August 2008.
•SMEs and Capital Investment, The Forum of Private Business, November 2005.
•Finance for Small and Medium-Sized Enterprises – The 2004 UK Survey of SME Finance, Warwick Business School, University of Warwick.
In October 2010, the FLA commissioned ABA Limited to prepare case studies of how small companies are obtaining finance to fund new equipment. These case studies showed that some businesses had delayed investment because of the economic uncertainty. For many businesses, leasing using vendor finance was seen as a more straightforward way to fund new equipment than using conventional bank loans, helping to avoid the need to provide personal collateral, avoiding fees and generally with a competitive interest rate.
The 2005 study on SMEs and Capital Investment found that:
•Overall, SMEs invested more in information communication technology (ICT) equipment than in any other asset class.
•Nearly 44% of SMEs were not able to make capital investments because they could not afford it. Given such a high proportion of SMEs experiencing financial difficulties, asset finance, with its cash flow benefits, could be an attractive source of financing to bridge this gap.
•SMEs used leasing as a means to finance investment frequently in some asset classes such as vehicles (i.e. cars and trucks), forklift trucks, photocopiers, telecoms and vending equipment.
•Businesses spending up to £5,000 on capital investments prefer to use either cash or leasing/rental/hire purchase
•For investments between £25,000 and £100,000, SMEs used leasing/rental/hire purchase as their main source of finance.
If you would like further details about any of the reports mentioned above please contact Research@fla.org.uk.

For more information about Leaseurope or this webpage, please contact Jurgita Bucyte or Hayley McEwen