Billions of inefficiently deployed capital say Siemens Financial Services

Siemens Financial Services has today published new research revealing that billions of euros are inefficiently tied up in private sector businesses in the UK, the main European economies and the United States at the very time when the credit crunch is starting to bite in the ‘real’ economy. Siemens’ report, Putting Capital to Work, shows that €409bn is being spent on the outright purchase of business equipment, instead of acquiring that equipment through a financing plan that would free-up working capital for investment in growth strategies. In the UK, nearly £38 billion (€47 billion) is ‘frozen’ in this way.

In the five main European economies (Germany, UK, Italy, France and Spain), over a quarter of a trillion Euros (€256bn) – lay ‘frozen’ in 2007 because plant, vehicles, and all other types of business equipment is bought outright by private sector businesses, rather than acquired using best practice financing techniques. Siemens’ report also calculates the ‘frozen capital’ figures as a proportion of GDP, revealing that private ‘frozen capital’ trapped in equipment purchases represents around 2% of GDP in the UK; compared with around 3% of GDP in the rest of Europe. Although the UK shows a relatively lower level of ‘frozen capital’ because of a comparatively high usage of asset finance, the clear message is that financial directors need to urgently explore alternative financing techniques in order to keep their firms competitive during a slow economic period.

James Gearey, Managing Director, Siemens Financial Services Limited, comments, “In economic terms, the current environment may be regarded as a much needed return to a more equitable correlation between borrower risk and lending rates. As a result, companies are having to look for alternative sources of finance to replace the tightening availability of credit, and to free-up ‘frozen’ working capital for more efficient and effective deployment.

Asset finance, in the form of leasing and rental arrangements, is particularly attractive in the current climate, as the financing package can be secured against the equipment asset, rather wholly depending on the obligor organisation’s credit status. Tools for improving cash-flow and working capital availability are increasingly under the spotlight as economic conditions tighten.”