January 2, 2024

Block Funding: Friend or Foe?

Non-bank asset finance companies in the UK are almost entirely reliant on Block Funding (Block) for the liquidity they need to trade.

Some see this as a strength in that Block is relatively simple, is not a banking product thrust upon us, and has been a staple source of funding for the last 10+ years. All of this is correct, although reliance on a single product is a material weakness and one I feel the asset finance industry should be taking steps to mitigate.

Because we rely almost exclusively on funding from banks, we function more as an extension of the banking industry rather than as an independent industry in our own right.

Mitigating Risks by Diversifying Funding

So, how do we mitigate that risk? Ultimately, the industry needs a reliable alternative source of finance. But first, we need to understand Block as a product and make it better; we can start by taking a look at where it came from.

The Evolution of Block Funding

Block held only a small share of the market before the Global Financial Crisis (GFC) hit 2008-10. Some considered it a product that was only for immature asset finance companies to enable them until they had enough scale to access a Revolving Credit Facility (RCF), and the structure of the product certainly appears to support this notion.

However, with banks basically removing RCFs from their offering in this market post-GFC, Block became the only game in town and had a much bigger role to fill. It is estimated that the Block market has gone from circa £150m provided by five providers to more like £1bn provided by 15+ providers. The numbers are estimates more than anything else, although they do illustrate the material growth of the product and its rising importance.

Assessing Block Funding's Fitness of Purpose

The numbers are impressive, although given there hasn’t been much in the way of competition, it is difficult to know whether Block is the right product or was just in the right place at the right time.

One question we should be asking is, what has changed?

Surely there have been significant developments in structure and/or process in the last decade?

I am sure there have been some developments, but these are hard to identify. Possibly a case of it’s growing and isn’t broken, so don’t fix it, an attitude that should be adjusted.

Excessive operational costs are an issue regularly raised, and with the access to technology we have today, I am sure greater efficiency could be found as a starting point.

Seeking Alternative Funding Sources

Creating a more efficient and attractive product will help the industry access alternative capital, and we need to develop a well-established alternative source of funding.

I could (and probably will) write another article on this, so will just say that we have all the pieces to put this together and, with yields up at attractive levels and a lot of liquidity in alternative markets looking for a home, next year might be a good time to work on this!

For more information, contact:

Christian Roelofs, CEO, Finativ

christian.roelofs@finativ.co.uk

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