Unlocking Asset Finance Opportunities with AI: Trends Shaping 2025

In November of 2024, growth in new business had been driven by commercial vehicle finance while the business new car finance and plant and machinery sectors fell compared with the same month in 2023.

As we look ahead to 2025, key trends will redefine how lenders, brokers, and businesses in Asset Finance navigate this evolving landscape. Here’s what lies ahead:

1. SMEs as the Key Growth Market

Amid subdued borrowing appetite across consumer and corporate sectors, SMEs stand out as the primary growth driver. Lenders are actively supporting small and medium-sized enterprises, recognizing their resilience and role in the UK economy. According to the Asset Finance Connect survey H2 2024,there is stark difference between lenders and brokers in the reading of the consumer market with banks substantially more positive than the brokers. We see that SMEs have shown marginally more positive appetite to borrow while demand from corporates and public sector has contracted.

Additionally, with the cost pressures impacting larger corporations, SMEs are turning to asset finance solutions to manage costs and maintain growth. More alternative lenders are entering the market, offering flexible financing models tailored to SMEs, ensuring better access to capital.

2. Regulatory Disruptions and Compliance Challenges

The asset finance industry is facing heightened regulatory scrutiny, particularly in light of the Court of Appeal’s ruling on commission disclosure. This verdict is prompting lenders to do a detailed review of sales processes and documentation. Additionally, FCA’s new consumer duty mandates that financial services firms using AI-driven processes like credit scoring and automated decision making must ensure good outcomes for the customers. These compliance costs are adding pressure on lenders to maintain profitability while ensuring adherence to evolving regulations.

In addition, the introduction of Basel 3.1 is set to impact capital requirements, will push up the cost of borrowing by requiring banks to hold more capital and removing the SME support factor. Lenders must navigate these changes carefully to remain competitive while maintaining compliance with evolving industry regulations.

3. Rise of Financial Innovation

Financial Innovation is becoming increasingly popular, enabling manufacturers and equipment suppliers to integrate financing options directly into their sales processes. According to Asset Finance Connect survey H2 2024, pay-per-use and as-a-service models are gaining traction, especially in commercial vehicle finance, allowing businesses to optimize cash flow while acquiring essential assets.

The financial services sector is also seeing a shift towards subscription-based models, where businesses pay for assets based on usage rather than outright ownership. This shift aligns with broader trends in the economy, where flexibility and scalability are increasingly valued over traditional ownership structures.

4. Inflation, Interest Rates, and Economic Headwinds leading to cost pressures

The UK’s economic environment saw a decline in inflation with Bank of England reducing interest rates to 4.5%. For the asset finance sector, a low-inflation and stabilizing interest rate presents both opportunities and challenges. Lower borrowing costs could spur investment in capital assets, particularly for SMEs that have been hesitant to take on financing due to high costs in previous years.

Additionally, lenders are facing increased operational costs due to ongoing regulatory compliance demands and technology investments. Many institutions are turning to AI-driven automation to enhance efficiency and reduce overheads. As interest rates potentially decline later in 2025, competition in asset finance is likely to intensify, with lenders needing to differentiate through tailored financial products and value-added services.

5. Fraud and Default Risks on the Rise

With rising business costs and economic uncertainty, lenders are closely monitoring the risk of defaults and fraud. Faced with the prospect of defaults, it’s becoming crucial for the lender to assist the customer in tacking any issues they are facing. This includes enhanced credit checks, AI-driven risk assessments, offering tailored plans where appropriate and increased scrutiny on asset inspections are becoming standard practices to mitigate potential losses.

The digitization of financial services has also increased exposure to cyber fraud, making it essential for lenders to invest in advanced fraud detection systems. Collaboration with regulatory bodies and financial institutions will be critical in strengthening the sector’s defences against financial crimes.

Conclusion

The UK asset finance sector is navigating a complex yet opportunity-rich landscape. Despite lower inflation and interest rate environment, uncertainty about demand and pressure on net margins have hit business confidence and investment intentions. FLA’s latest industry outlook FLA’s latest industry outlook suggested that almost two-thirds of asset finance respondents expect some increase in new business over the next year.

Since competition is intense in this space, lenders who will embrace digital transformation, adapt to new regulatory frameworks, and innovate with flexible financing models will thrive in 2025. As businesses seek greater financial agility, the future of asset finance will be defined by sustainability, technology, and customer-centric solutions.

Staying ahead of these trends will be crucial for lenders and businesses alike, ensuring they remain competitive in an industry undergoing rapid evolution. With the continued growth of green finance, embedded financial solutions, and AI-driven lending, the future of asset finance in the UK looks promising for those who innovate and adapt.

Author: Akshat Dev, Partnership Development Strategy at Digilytics AI

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