January 2, 2024

2024 Outlook: Industry Experts Weigh In on the Future of SME Lending

The start of the new year is a time when people often think about the year ahead. This year, I decided to ask a few industry friends for their thoughts on major trends and events that will help shape SME lending in 2024. Below are our combined observations - my sincere thanks go to Ylva Oertengren, Simon Goldie and Christian Roelofs for their much-valued contributions.

Uncertain Economic and Political Conditions

While conditions are much more stable than in late 22/early 23, economic uncertainty remains. Both inflation and interest rates are expected to decline but slowly – with possibly no change in interest rates during 2024. At some point, there’s likely to be a general election (and potentially a new party in charge), though this could also be pushed into early 2025. 

For some businesses, this will lead to delays in investment decisions, not helped by any further U-turns in government policies (as recently experienced with HS2 and the phasing out of ICE vehicles). Overall, the OBR’s November projection for business investment in 2024 is down nearly 6% on 2023. 

Default risks are expected to rise. Recent insolvency rates are at their highest since 2009 and are expected to remain high. Sectors with high energy usage will continue to suffer. Consumer spending will remain under pressure as low, fixed-rate mortgage deals lapse, and the OBR’s 2024 forecast for Real Household Disposable Income is a fall of 0.9%. As an early signal, the fall-out from Christmas trading will be interesting. A drop in consumer confidence will filter into the SME market and, alongside other headwinds, drive an increase in borrowing arrears.

The asset finance sector proved itself to be robust through the Covid pandemic. 2024 market conditions are likely to offer challenges, but these should be fully manageable. Finance companies are aware of the risks and will be prepared. 

Economic forecasts have a habit of being wrong, and based on their on-the-ground experience (continued growth and low arrears), many finance companies remain bullishly in growth mode and may enjoy a very successful 2024. 

Government Intervention

One piece of good news is that the full expensing of asset purchases has been made permanent, as announced in the Autumn Statement, albeit that it places specialist leasing businesses at a disadvantage. 

The ESG reporting regime is moving towards becoming more established, detailed and coordinated. The government is currently reviewing the international standard IFRSS2 which could lead to a mandating of Scope 3 reporting for listed companies (though not in 2024). A growing ESG imperative will drive new business models (including more “purpose-led” organisations) and lending opportunities.

The current version of RLS will expire and is likely to be replaced in April, with an announcement expected in the Spring Budget. There is speculation that the new solution will be targeted towards investment in green assets.

While implementation of Basel 3.1 capital arrangements has been pushed back to 1/7/25, “near-final” rules will be made available in Q2, including treatment of the SME Support Factor, with knock-on impacts on profitability, pricing and competitive dynamics. 

Lending Models

It is expected that lending models will evolve rather than change radically. 

The broker market is expected to continue to grow and consolidate, with larger broker firms expanding their sales reach under well-managed regulatory umbrellas. New business models will evolve, especially for larger firms that could shift towards offering a broader product set, more own-book activity, or participating in joint funding models with lenders.

In captive and vendor finance situations, 'as-a-service' lending is on the increase, though not yet near the scale predicted, and pay-per-use solutions will continue to evolve.    

Commoditisation and Specialisation

Continued simplification of the asset finance product – whether for reasons of market effectiveness, regulation, related transparency, process efficiency or scalability – has already driven a level of commoditisation with less availability of income streams beyond money-over-money margins. As a result, in many cases, the primary differentiator between competing lenders has become price (this was shown clearly during periods of interest volatility in 2022/3).

This has increased the power at scale of larger lenders with low funding costs and has driven a rise in the number of niche specialist lenders who aim to build market-specific competitive advantage, often below the scale required by a large lender or driven by growth-oriented shareholders able to spot attractive lending niches. For these firms, the need for continued growth is likely to remain in 2024.

Net Zero

The transition to net zero will continue, creating new lending opportunities. Scaling up seems inevitable but the transition will not always be smooth, especially in liquid markets like cars and vans, where new and especially used values will be prone to variation. The adoption of new BEVs will remain hindered by high prices and first-life depreciation, leading to threats from lower-cost market entrants. The corporate market will continue to lead the way, aided by attractive BIK rates.

Funding of renewable energy assets will remain a struggle for many lenders, unable or unwilling to modify historic practices.

For the BBB or larger financial institutions seeking to underpin green financing, the development of a suitable wholesale finance solution to support intermediary lenders was highlighted as an opportunity for purpose-led, profitable growth.

Technology

AI and IoT technologies are expected to evolve rapidly, with the potential to herald new ways of lending that aren’t expected to be realised at scale in 2024. The role of IoT data in supporting more effective asset management - usage patterns, maintenance and replacement – is noted.

Digitalisation will continue to raise table stakes for competition and, if done well, will provide points of differentiation for lenders. Connectivity through APIs will continue to support better integration between trading partners and new ways of working. Increasingly, point solutions that help to streamline processes and add new areas of value will be adopted. 

Connected technology developments will be aided by the continuing rollout of 5G, able to support more sophisticated environments for information flows.

M&A and Other Structures

Some consolidation may occur if trading conditions and profitability decline, though given the impact of recent interest rises, buyers and sellers are likely to have materially different views on value. Neither is wrong, so unless a seller is distressed or the acquirer is looking for a strategic investment, the M&A market is likely to remain quiet.

Some funders will look to alternative structures to drive growth and right-shaping, such as partnerships (to access capabilities or new business volumes), forward flow arrangements (for market access) and outsourcing (for operational capabilities).

Outlook

The asset finance market is likely to have been around £38bn of new business in 2023, with over 80 lenders. There will be market challenges in 2024 that need to be overcome, but equally, there is a wide range of growth-related opportunities available to the brave, the smart and the committed.

To discuss any of the topics discussed in this article, please contact:

Peter Hunt, Chief Operating Officer, Finativ

e-mail: peter.hunt@finativ.co.uk

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