Improving UK productivity: the role of asset finance
The decline in UK productivity following the financial crisis of 2008/2009 has been much debated by economists, policymakers and business leaders alike. The British Business Bank's Matt Adey considers what this means for the asset finance sector.
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The British Business Bank is the UK’s economic development bank. Our mission is to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by improving access to finance for smaller businesses. Asset finance plays an important role in driving that growth.
Productivity growth in the UK has long been a concern. In the 10 years before the global financial crisis, productivity growth grew at 2% per year; since then it has grown at less than 1% per year – and UK productivity levels are significantly below our competitors such as the US, Germany and France.
This matters because productivity growth is essential for long-term economic growth. The Office for Budget Responsibility, who provide independent analysis of the UK’s public finances, forecast that even when the UK economy recovers from its current slow growth, the medium-term potential growth rate is only 1.75%.
There are many potential explanations for the UK’s poor productivity ranging from lack of investment - both by business and government, low levels of skills and training, to poor management and slow adoption of new technologies.
Lack of business investment and low levels of innovation are particular problems. Business investment has seen a long-term decline since the 1980s with those low levels persisting since 2016. Again, there are many explanations, but a key one is the low level of corporate borrowing.
Smaller businesses in particular have greater difficulty in accessing finance. Only one in three smaller businesses are happy to borrow to grow, and over the last 18 months only one in two of those that seek finance have been successful. Improved access to finance would help those businesses to invest in growth.
On innovation, the UK economy is a global leader ranking fourth in the 2022 Global Innovation Index. This is helped by the high ranking of our universities, giving a strong science and research base. But behind those world leading strengths there is a long-tail of low productivity businesses. The share of UK smaller businesses classified as innovative is below the G7 average. British Business Bank research suggests that the UK would need an additional 440,000 innovative smaller businesses to reach the average G7 innovation levels.
Access to finance
Innovation and access to finance are related - smaller businesses that use finance are more likely to innovate, and innovative firms are more likely to use finance. 'Lack of finance' is a barrier to innovation with 'availability of finance' and 'cost of finance' the second and third-ranked innovation barriers, behind only the current difficult macro-economic environment.
Asset finance is often used by smaller businesses looking to invest and innovate. For smaller business applications for repayable finance, asset finance is most likely to be used (22%) narrowly ahead of overdrafts and bank loans.
Asset finance is also widely used to finance a wide range of business investment ranging across different types of equipment from IT to vehicles. Furthermore, one in five smaller businesses are willing to consider external finance for net zero action. Where that involves financing investment in low carbon, asset finance may well be used.
During 2023, flows of bank lending to smaller businesses have edged down nearly 4%, but asset finance has grown with year-to-date figures showing asset finance flows have risen by 18% and success rates for those seeking leasing and hire purchase are considerably higher than for other finance products. This demonstrates the positive role that asset finance is playing in driving up business investment and innovation and helping to improve productivity.
It is important that the British Business Bank continues to support providers of asset finance to enable investment, innovation and sustainable growth amongst the UK’s smaller businesses.