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enabling factors in SME funding option - report 6

  Enabling factors 139. The operation of leasing does not require a strong lending infrastructure. Indeed, as Berger and Udell (2006) underl...


Enabling factors 139. The operation of leasing does not require a strong lending infrastructure. Indeed, as Berger and Udell (2006) underline, a weak regulatory environment that does not support the use of collateral and bankruptcy rights may encourage the use of alternative instruments, where the lender owns the asset. At the same time, leasing can be difficult to implement in countries that lack a national asset register, as illegal on-selling of leased assets is easier, or with weak laws on repossession, which undermine the ability of the lessor to repossess the asset in the case of default (USAID, 2009). 140. The development of leasing also depends on the rules that govern the institutions offering lease services. Leasing companies are typically non-deposit taking institutions and are therefore subject to less stringent capital requirements than banks, which may allow them higher leverage. On the other hand, the cost of money can be higher for these institutions, as they have to source funding from more volatile and expensive markets (Gallardo, 1997).

 In some countries, however, minimum capital requirements are imposed on non-bank lessors, implying limitation of lending to a proportion of their net asset value. 141. Tax regulation may affect leasing decision of firms, although the empirical evidence is not conclusive in this regard (Lasfer and Levis, 1998). In principle, tax breaks can make the leasing option advantageous over bank financing, particularly in the case of operational lease. In this case lessees can offset their full lease payments against income before tax, compared to the depreciation allowance or the interest charges on bank loans. In the case of finance lease deduction applies only to the interest component of the payment. The overall tax benefits of finance lease, however, depend on the type of asset leased and the rules over depreciation, which can be claimed by the lessee in its balance sheet. In addition, lessors may be able to pass on to lessees some tax benefits related to their depreciation charges as owners of the asset leased, by lowering their financing costs (Gallardo, 1997). 3.5 Trends 142. Asset-based finance is a popular form of finance for SMEs, whose diffusion has substantially increased over the last decades, although, on the supply side, it has been significantly affected by the financial crisis. In the case of leasing, for instance, refinancing conditions for leasing companies worsened in many countries (Kraemer-Eis and Lang, 2012). At the same time, as awareness increased and access to other bank debt has become more difficult for many businesses, demand for asset-based instruments has significantly increased since the 2008-09 global financial crisis. In the UK, for instance, the Asset Based Finance Association (ABFA) has reported a 10% growth for the industry over June 2012- June 2013, accounting for the highest level of advances to companies since 2008, in sharp contrast to the declining net lending figures in the country. Both small and large firms are contributing to this positive trend, with advances to small firms (GBP 500 000 – 1 million) recording a 6.2% growth in the second quarter of 2013. 143. Asset-based lending has been expanding in many OECD countries. In the United States, the Commercial Finance Association (CFA) has recorded steady increase in new credit commitments among asset-based lenders in 2011-12, following a decline in 2009-10. Its Quarterly Asset-Based Lending Index, built on evidence from 22 of the largest CFA members, shows that in 2Q2012 total commitments rose by 7.7% compared to the same quarter in 2011. However, businesses’ persistent difficulties are reflected in loan performance: lenders’ non-accruing loans as a percentage of their total asset-based loans outstanding rose slightly in 2011, after declining over 20108 . In the UK, the level of assets financed has increased by 33% since 2006, to GBP 36.2 billion in 2012, according to PricewaterhouseCoopers9 . 144. In the aftermath of the crisis, asset-based lending has also been used as part of a loan package, the so-called “bifurcated collateral loan”, whereby a portion of the loan is secured by accounts receivable or inventory (ABL portion) and another part is structured as a traditional term loan, secured by remaining assets, such as real estate, machinery and equipment or intellectual property (Migliero, 2012). 145. In Canada, the Canadian Finance & Leasing Association (CFLA) estimates the asset-based financing and leasing industry to be the largest provider of debt financing to business customers and consumers in the country after the traditional lenders (banks and credit unions), with value of assets financed having increased from CAD 50 billion in 1997 to CAD 105.4 billion in 200710. 146. The 2014 Survey on the Access to Finance of Small and Medium-sized Enterprises (SAFE), conducted by the European Central Bank and the European Commission, shows that, in EU-28, “leasing or hire-purchase” ranks high among SME sources of finance. Nearly half of respondents (47%) used these asset-based instruments in the past or considered using them in the future. This is about at par with the use of “bank overdrafts or credit lines” whereas “bank loans” remain the main source of external financing for small businesses over time. The survey also indicates that trade credit is considered as a main source of external finance by 33% of SMEs in the European Union.

147. The 4th Regional Survey on Banks and SMEs in Latina America, conducted in 2012 by the InterAmerican Development Bank on 106 banks across 20 countries, illustrates the range of products offered by banks to SMEs, and highlights in particular the increasing importance of asset-based instruments such as leasing and, to a lesser degree, factoring (Figure 2). Leasing is supplied to SMEs by 24% of the surveyed financial institutions, whereas factoring is provided by 9% of the banks (IDB, 2012). Figure 2. Type of financial products offered by banks to SMEs,

 Latina America and Caribbean, 2012 (% of banks providing a product) Source: IDB (2012). 148. According to a survey conducted in 2012 by the International Chamber of Commerce (ICC) on more than 200 banks located in 110 countries, trade finance is in high demand, with the majority of transactions being based on commercial letters of credit, although a shortage of liquidity and a disproportionate aversion to risk continue to drive up interest rates on loans and advances in a number of countries (ICC, 2012). 149. Factoring is a key instrument in trade finance. 

Worldwide, the factoring industry has grown rapidly since the 1990s: the factoring volume increased by 88% between 1998 and 2004 (Klapper, 2006) and by 98% between 2005 and 2011 (FCI, 2013). However, most of the factoring business is concentrated in Europe, which accounted for 60.9% of the global volume in 2012, with the four largest countries (UK, France, Germany and Italy) accounting for about 50% of the volume. In the same year, the US and Japan accounted for 3.6% and 4.6% of the worldwide factoring volume (FCI, 2013). 

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