Why do firms lease equipment? The potential reasons are many...the cash flow benefits, funding availability, flexibility, convenience, cost, and so on. That all works for the small and medium-sized enterprises (SMEs) that make up over 99% of UK businesses (see my earlier article for further analysis of the SME segment, particularly the broker element of it).
But what about the largest companies? This includes the UK's 8,000 firms with over 250 employees. They make up 48% of UK business turnover. Given the Government-backed bounce back loans available to small businesses, they might be the first to need to lease new equipment in the recovery.
Do we know enough about who they are? Do we know why they lease?
To begin to address these questions, I've recently completed an extensive survey of the accounts of most UK listed companies and other large non-listed firms to identify their use of leasing.
Much as I hate to admit it, it's helped by the extra disclosures that listed companies using the new lease accounting standard IFRS 16 now make, that usually provide a split of former operating leases between property and other assets. (As an aside, I'd note this could easily have been achieved without putting these leases on-balance sheet).
This survey has resulted in a report, now available, that identifies the 425 UK firms leasing over £5 million of plant and equipment including vehicles. I'll save the details for those looking at the report, but I'm confident it includes most large UK lessees - probably the first time this information has ever been available to lessors.
Here are a few key findings based on this survey together with key data from the latest Asset Finance 50 industry ranking survey (this all refers to equipment and vehicle leasing i.e. non-property by large firms):
Around 30% of the UK leasing market is to large companies as end-users of leasing
Additionally, around 13% of the market is to medium and large equipment hire companies, for them to hire out the kit to end-users
The majority of firms have quite limited use of leasing, often 'only' £1m to £2m, presumably comprising mainly fleet cars and some IT
A sizeable minority of firms makes more substantial use, to some extent in sectors where this is to be expected (e.g. transportation, construction), but the 'superusers' with leasing over £50m seem to span many industries
Many firms adopting IFRS 16 for the first time appear to have reduced their use of former operating leases, which could reflect accounting and other factors
So what can we draw from this? What's clear from the inconsistent, but sometimes sizeable, use of leasing by the largest companies is that the reasons for leasing vary by lessee. Compared to SMEs, I suspect they are less about cashflow, and more about specific aspects of asset management before, during and after the firm's use.
Particularly with IFRS 16 there's a need to help large firms identify and measure these reasons, so the extra accounting effort involved for former operating leases doesn't cause the real economic benefits of leasing to be forgotten.
Knowing who the large lessees are, and identifying and supporting the benefits to them, should help the industry and the wider economy to recover.