Credit Crunch Creates UK Business Investment Shortfall

A new survey from Siemens Financial Services Limited in the UK, the provider of business finance solutions, has found that the UK economy’s ongoing stagnation is seriously hindering businesses’ ability to invest in essential equipment and technology – predicting that business investment (defined as spend on plants and machinery, new buildings) will be down by 2% on the same period last year, culminating in a £1.5 billion shortfall. Small and medium-sized companies are those making the vast majority of the investment cutbacks.

Research amongst 736 UK firms, including a representative sample of all industries and company sizes, reveals that overall the UK economy is to further reduce its spend on business investment for the second half of this year – an extended period of negative growth, as during the first 6-months of 2008 business investment shrank from the second half of 2007.

Reiterating the scarcity of cash in the current environment, business leaders also pinpointed their top financial priorities as ‘improving profitability’ (62.3%), followed by ‘reinvesting in the business’ (46.3%) and ‘increasing turnover’ (39.5%) – ‘returning cash to shareholders’ was only a priority for 15.4% of those surveyed. If corporate UK is to meet this goal – of improving profitability whilst reinvesting in the business – then this places immediate pressure on businesses to invest in highly efficient ways, without placing burdens on earnings and liquidity. Financing techniques such as asset finance (leasing) will be fundamental to firms seeking to successfully reconcile this apparent conflict between the financial and commercial requirements of a business.

Siemens’ research also pinpoints which types of business equipment firms view as a priority to remain competitive. When asked where their investment priorities lie over the next 3 years, UK companies highlighted ‘IT software’ (50.5%), ‘IT hardware’ (49.7%) and ‘training’ (40.7%). Again, in order to avoid the prohibitive upfront costs often associated with such investments, asset finance is likely to play a key role here – particularly since modern financing contracts have developed to a level of sophistication where ‘soft’ costs such as training can be integrated in the monthly payment plan.

The decline in investment spend is not being evenly felt across all company sizes, as small and medium sized firms are predicted to make the vast majority of reductions. Small companies (50-199 employees) seeing a 2.54% fall, medium sized companies (200-2499 employees) a 2.42% fall, and large companies (2500+ employees) only a 0.9% fall in spending on business investment. This suggests that larger corporations have been better able to manage balance sheets and continue reinvesting in essential business infrastructure.

Peter Austin, General Manager, Siemens Financial Services Limited, comments, “This research supports the growing concerns that the financial markets crisis is causing firms to delay important business investment decisions. It is a classic short-term reaction to a very real financial pressure, but one with a detrimental impact on long-term commercial performance. The primary reason that companies are putting back their procurement plans is because they are overly reliant on bank finance, which we know is badly hit by the credit crunch and the subject of major credit limit revisions and cost increases. Historically, the UK’s reliance on bank finance is reflective of an ownership mentality that has become ingrained during the years of inexpensive credit.

“However, companies clearly realise the importance of an up-to-date technology and equipment base – with half of the surveyed firms claiming that IT software and hardware are top priorities for business investment in the next 3 years. So if they are to meet their investment requirements, they simply must diversify their mix of funding tools that will help them become less reliant on bank credit, and give them immediate access to the equipment, technology and other assets that help them improve long-term profitability. A leasing plan, for instance, would help them avoid the need for a large upfront payment, spread costs and bring much-needed transparency to their financial planning.”