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The European leasing and asset finance market for small and medium-sized enterprises (SMEs) is positive, according to Rob van den Heuvel, DLL's General Manager for Europe. Financing should become “more accessible” in 2025, he says, thanks to the anticipated interest rate cuts from the European Central Bank (ECB).
The ECB began lowering its policy interest rates last June, delivering four cuts in 2024. This resulted in interest rates on its deposit facility, main refinancing operations and marginal lending facility falling to 3.00%, 3.15% and 3.40%, respectively.
This will not deliver an economic boom, but it should improve prospects, with GDP for the Euro Zone expected to grow by 1.1% in real terms this year, up from 0.7% in 2024, according to the latest monthly Euro Zone Barometer survey of economic forecasting experts. The survey shows investment spending turning upwards, following a contraction last year, exports growing more rapidly, and inflation easing in line with the ECB’s 2% target.
Underpinning this brighter picture, more interest rate cuts are expected by economists for 2025. This further reduction in borrowing costs will encourage SMEs to lease equipment and other assets. Asset price inflation will also drive up the demand for financing.
Looking ahead to 2025, BNP Paribas highlights three main factors impacting leasing companies. One is the interest rate environment, with rate cuts lowering financing costs and improving spreads on leasing contracts. There will likely be more attractive financing terms for customers and possibly higher demand vis-a-vis direct purchasing.
Another is the regulatory environment, including the implementation of Basel IV requirements and enhanced ESG reporting standards, the circular economy regulations driving new leasing models, and stricter asset valuation requirements and sustainability disclosures becoming mandatory.
Third, is market dynamics, with rising demand for flexible financing solutions and technology-focused offerings in the equipment leasing space, and EV adoption and growth in fleet management services important for the auto market.
As for SMEs, “those that align their investment strategies with sustainable business practices, leverage digital tools for financing and take advantage of government incentives are likely to navigate the challenges and seize the opportunities in 2025”, says Jason Hurwitz, sales director Europe for NetSol Technologies. Their success, he says, will depend heavily on “managing rising costs and adapting to stricter financing and environmental standards.”
Most finance industry experts are in agreement that lower interest rates and inflation will support consumer confidence and household spending across Europe, bolstering the demand for leased assets. Technological advancements and the focus on sustainability, moreover, will drive interest in high-tech and energy-efficient equipment.
There is continued interest and experimentation with artificial intelligence (AI) for driving improvements in productivity, Hurwitz points out. The best examples will lead to material efficiency gains, he says, resulting in service improvements and cost reductions that generate higher returns for lessors.
Financing equipment with service is becoming more and more important for vendors in their product offering,” says DLL’s van den Heuvel, “especially given the dependency they have on the service income streams.” Leasing is the perfect solution, he adds, and it will remain important as equipment prices keep on rising.
Growth markets
Identifying where in Europe is likely to offer more business growth is important, with northern Europe facing “market maturity challenges,” according to BNP Paribas, while Southern Europe has significant modernisation needs with a strong focus on SMEs.
Germany, France and Italy certainly face challenges. Germany’s economic model is under strain, says van den Heuvel, due to its high energy costs, increased competition and ageing workforce, leading to modest growth prospects. Similar structural issues are affecting other core Euro Zone members, including Italy.
Financing prospects are brighter in Spain. Although its rapidly expanding economy will slow down, it has consistently outpaced the Euro Zone average, supported by substantial EU recovery funds, strong net migration, and a booming tourism industry.
Asset finance advisors Invigors takes a similar view in relation to the larger countries, although it does point out that Germany might be a more positive story if it can profit from any Russia-Ukraine peace dividend and its manufacturers capitalise on “practical AI exploitation.”
Like DLL, Invigors’ executive director Paul Johnson-Ferguson and his colleagues, Ian Robertson, Tim Pearce and Bill Nasri, highlight growing confidence in Spain, but also indicate there is some resilience in Italy, opportunities in Greece, and single out Poland as a country of interest. There, GDP growth is solid, the country is increasing its influence over economic and national security issues, as a strong US ally, and it offers an opportunity to capitalise on struggling European economies that have traditionally dominated the European financing landscape.
Eastern Europe generally is undergoing rapid digital transformation and energy transition, BNP Paribas points out, creating diverse leasing opportunities.
Last year’s challenges
This improving outlook comes on the back of SME’s demonstrating “courage and resilience amid the economic challenges in 2024,” according to Jason Hurwitz, European sales director for NetSol technologies. These challenges include high inflation rates that slowly subsided, political instabilities, low-to-no GDP growth in many European economies, and persistently high energy costs.
Unsurprisingly, de-industrialisation and high energy prices were negative factors for energy-intensive businesses, in Germany for example. Political risk also impacted business sentiment. The French Association of Finance Companies (ASF) reported sluggish growth in financing of 0.7% (year-on-year) for the first nine months of the year. The major economies’ leasing businesses also saw SME credit defaults and losses return to the high levels evinced prior to the pandemic. According to Invigors, this will impact on pricing, acceptance rates and borrowing appetites into 2025.
Encouragingly, borrowing rates stabilised in 2024, and began to ease, having a positive impact on lending. Lenders also continued to adapt. DLL, for example, introduced several solutions in terms of its processes and platforms to meet its partners’ and customers’ digital expectations, with large investments in product management and development capabilities, and importantly achieving “speed, ease, and convenience at point-of-sales,” says van den Heuvel.
DLL saw growth in the agricultural sector, where it has most of its SME clients, as well as in construction and the materials handling business, especially in Germany, France, the Benelux countries, and Poland.
But not all lenders’ experiences were the same. Invigors’ Johnson-Ferguson and his colleagues note how new equipment sales in the agricultural sector struggled in 2024. They point out that SIMA, the largest European trade fair for agriculture, which usually attracts around a thousand businesses from all over Europe every two years, was cancelled a few weeks before it started, due to a lack of uptake.
The European auto manufacturing supply chain was “highly stressed,” they add, due to underwhelming demand for EVs and the impact of government targets on uptakes of personal and commercial vehicles. There were also alignment challenges for funders, with market shares in key territories shifting from western to eastern (specifically Chinese) EV brands.
Future risks…
The economic outlook remains highly uncertain, a fact that was brought home by increased global financial volatility not long into the new year, and it is this that will have the greatest impact on SME demand, according to many experts.
Although some efforts have been made to establish peace in the Middle East, and a similar deal to end the Russia-Ukraine war would undoubtedly improve confidence, Donald Trump’s second term is expected to result in a new tariffs war impinging on global trade that will also impact business sentiment, including SMEs.
These tariffs will likely hit non-allied countries, but it is not clear yet what will be the full impact. According to Invigors, tariffs will be targeted to drive behavioural change. This means they may not be as stringent as feared. With their threat viewed as a negotiating tactic, their ultimate impact will depend on how well the targeted nations position themselves.
Across Europe, high and rising energy prices and political instabilities are important factors, notably given the elections in Germany, and the political issues in France that are highlighting other flashpoints (in Austria, for instance) linked to the rise of the populist-right.
They are issues that could all exacerbate industrial weaknesses, according to DLL’s van den Heuvel, leading to job losses and the moving of uncompetitive production out of the Euro Zone. “These factors could make SMEs cautious about long-term commitments,” he says. This means businesses will need to navigate the economic landscape carefully, despite there being growth eyed in the leasing market.
…and opportunities
Yet amid these warnings there are clearly major opportunities ahead, including more automation, with the use of AI, and more sustainable choices. DLL’s van den Heuvel notes that the upcoming Corporate Sustainability Reporting Directive, making EU companies disclose their impact on the environment, will drive green finance.
Hurwitz of NetSol technologies identifies three particular aspects of the auto market to watch in 2025, impacting European lenders. One is AI streamlining auto risk assessments and automating back-office functions. Second is that autonomous vehicles will grow significantly driven by competition among manufacturers. Third is the growth of mobility finance and maximising asset value with the proliferation of subscription models.
The energy transition will be increasingly important for leasing too, especially given the costs of equipment, with energy-as-a-service, and battery and long-term energy storage solutions areas to watch, according to Invigors’ Johnson-Ferguson et al, who also point out the role of pricing, noting how auto leasing markets have seen residual value impairments rise with a lowering of residual values for new vehicles. This has meant a steepening of the monthly lease rates, which are now being quoted on standard sector cars at 60-75% more than equivalent models between 2020-2024.
Van den Heuvel also sees the market moving towards full-service leasing and usage-based financing, especially in the workplace, healthcare and tech solutions areas. The agricultural, construction and transport sectors tend to be more conservative, he says, meaning that the ownership of assets remains important. However, in these sectors, asset service offerings are increasing, he says. With this, leasing becomes more attractive, as the end-customer can upgrade the equipment after the first life cycle.
Europe’s leasing companies that excel in four key areas will navigate the challenges and thrive in 2025, says BNP Paribas. They include operational excellence (i.e. digital efficiency and cost management), strategic positioning (with market specialisation and innovation capability), adaptation capability (market responsiveness and digital transformation), and sustainability leadership in terms of ESG integration and green product development.
"European SME financing in 2025: lower rates, rising opportunities" was originally created and published by Leasing Life, a GlobalData owned brand.
Source: https://finance.yahoo.com/news/european-sme-financing-2025-lower-171504327.html