Opinion
Moving the dial Funding green assets of the future John Phillipou Managing Director – SME Lending Paragon Bank
J
ust like any specialist lender, we are continuously expanding our expertise, innovating our product range, and extending our lending. As a funder, we are currently looking at how we can support our customers on their green journey and the Government’s Recovery Loan Scheme (RLS) presents new opportunities for lenders and businesses in this area. One of the great things about the RLS is that it has relatively simple eligibility criteria, which has helped both lenders and borrowers. The two foundation stones for the scheme are that an RLS loan should either create cheaper funding for the client or facilitate loans we would struggle to fund as part of our everyday ‘business as usual’ lending policy. The latter is a big benefit for two reasons. Firstly, it allows us to lend against technologically advanced, innovative assets that will help power SMEs’ recovery forward, but that aren’t always ‘tried and tested’ to meet our usual criteria. Secondly, it means we can now lend to customers that may not meet our credit risk requirements because of the short-to-medium term impact of COVID-19 on their business, helping those businesses to recover post-pandemic. Examples of green assets that we have recently approved include battery powered cars, electric taxi fleets, electric bin lorries, waste to energy conversion plant material, and biomass boilers. We anticipate that more sustainable and innovative green assets are going to be funded – for example, the use of electric or hydrogen cell technology and other similar initiatives. Historically, those assets can be challenging to fund over the long-term as there is an unknown element to how they perform over time. Schemes like RLS can help lenders adjust their risk appetite to facilitate green lending better in the future. 48 | NACFB
Another emerging trend is around funding the technological part of the asset, not just the mechanical piece. When agreeing a loan against an asset, banks look carefully at the value of the equipment involved based upon resale data. As the market goes more digital, the value of the assets is transitioning from pure ‘metal’ costs towards the softer ‘system and interface’ costs. This upgrade in technology means that banks can’t easily pin a security price, which means lending against digitally powered assets has historically been a challenge. With those assets, software is the most expensive thing but currently valued at zero by many lenders. RLS will give lenders the opportunity to ‘lend and learn’ and review processes and lending criteria for the long-term. In that sense, RLS has the potential to empower and support the path of digital transformation amongst UK SMEs. Given the myriad of green options, it can be difficult for a business to know where to begin. A good place to start is for a business to really get to grips with their carbon footprint. It’s quite hard for SMEs to know what their carbon footprint is, but there are resources available to support with this including those offered by the Carbon Trust. If business owners do the work to establish this, they will often find there are incentives available to lower it. It’s also important to note that this is a really good time for SMEs to begin this journey to a greener future. The pandemic has moved the dial on the green agenda – we are coming out of the pandemic with a much bigger focus on improving quality of life and there is a much bigger consumer emphasis on a business’ environmental credentials.
“
…software is the most expensive thing but currently valued at zero by many lenders
