Money makes the world go round, or so the saying goes.
For manufacturers, though, finding the cash to fund their operations is a constant battle – spend too much and struggle to make ends meet; spend too little and get left behind as your competitors invest heavily. Finding the right balance is a dark art, and one that many individuals and organisations, including manufacturers, have difficulty in understanding.
Asset finance is fast becoming the answer to companies’ prayers, however. Especially popular in the consumer sector, particularly with new car leasing (http://tinyurl.com/lsg8778), it works by using balance sheet assets to obtain a loan or borrow money where the borrower provides a security interest in the assets of the lender.
“Asset finance is an ideal funding option for manufacturers,” says Gordon Ferguson, director and head of hire purchasing & leasing at Lloyds Bank Commercial Banking. “It’s crucial that firms in the sector easily invest in the high-value, business-critical equipment they generally need to grow, without damaging their working capital.”
Financial uncertainty is, and always will be, the biggest threat to investment. Asset finance has a major advantage in that it allows business to invest without damaging the capital they may need of their financial circumstances change. An increasing number of manufacturers are recognising the value of asset finance to fund their investment. The latest figures from the Finance & Leasing Association show that asset finance new business rose by 9% year-on-year in the first quarter of 2017. Plant and machinery finance grew by 18% year-on-year in the same period.
Productivity benefits
More than most other industries, manufacturing’s success is largely dependent on investment in the right equipment and the latest technology. According to John Kelly, director of manufacturing at Lombard, companies have been put off investing in machinery as they are worried about having to make redundancies as a result. “We see it as the opposite,” says Kelly. “A new machine will make you more productive, and you can use the freed-up human resource on tasks that add more to the business. In the longer term you will see more employment, rather than less. Investment in machinery is not a threat to jobs. Investment equals growth, which in turn means more employment.”
Kelly also explains that the additional profit generated by the boost in productivity will be used to pay off the asset. “Asset finance allows companies to spread the cost over a longer term, which marries up with the benefits they are expecting to get from the asset itself,” he says. “A company that is looking to grow can match the finance payments off against the expected growth in profits that the asset will bring. This means they will only need to find a deposit of 10-20% on day one, but can spread out the remainder against future profits.”
Asset finance has a particular benefit to SME manufacturers, explains Ferguson, as it means they can spread the cost of the new asset out over a period of time, without having to stump up the cash up front. “It allows growing businesses to invest in new assets and the latest technology, budget with certainty and spread costs over an agreed term,” he says. “It’s an easily manageable, transparent funding route – perfect for firms looking to expand with confidence.”
In their Future Fits report (http://tinyurl.com/lg78wud), which looked at the manufacturing industry’s attitudes to investment, NatWest found that 91% of medium-sized manufacturing companies agreed that they have to accelerate their capabilities over the next decade in order to stay competitive. However, 14% of these have no plan in place to help them do that, saying that the day-to-day pressures of running a business makes looking to the future nigh-on impossible.
“By their very nature, SMEs don’t tend to have the financial clout, such as overdrafts or working capital, that larger companies have,” says Kelly. “If they’re looking to buy machinery – or any other asset – directly out of their cash reserves, that will all be gone on day one.”
Keeping up with change
Those SMEs struggling to keep their heads above water are also facing increasing pressure to adapt to technological changes in the manufacturing industry. “Automation, Industry 4.0 and the pace of technology more generally are constantly challenging manufacturers to invest in their physical resources to remain competitive,” says Ferguson. “But doing so can be expensive, with large up-front costs before businesses can start to realise the benefits.”
Ferguson explains how other, more specialised, asset finance can help. “Tooling finance was developed by Lloyds’ manufacturing team and is tailored to firms with a proven track record in the automotive supply chain. It provides funding to help manufacturers working in this space invest in the tooling needed to tender for, and progress, new business opportunities.”
Drawbacks
As with any finance plan, asset finance comes with its downsides. Any lender will assess a number of criteria before approving a deal, explains Kelly. “It’s important to look at the payback that a particular sector can offer,” he says. “If a customer is in a volatile sector, or a struggling one, we have an internal meeting where we look at any potential pitfalls of their current performance. That way, if there is a downturn for whatever reason – market volatility, or an over-reliance on one or two customers, for instance – we can take those risks into account.”
Changing technologies also come with a risk, says Ferguson. “New and emerging technologies may require a degree of additional expertise before they can be easily underwritten.”
Despite this, the need for innovation goes on. For the manufacturing sector in the UK, and SMEs in particular, investment is a constant struggle, but one that must be persevered with. Indeed, as Kelly warns, “if the UK’s manufacturing sector doesn’t continue to invest in equipment, other countries will soon overtake us.”
Case study: A sweet deal
A Hampshire manufacturer of ice cream has installed a new state-of-the-art dairy thanks to funding from Lloyds Bank.
Family-run Jude’s Ice Cream, which supplies high-end supermarkets including Waitrose, Selfridges and Ocado, has increased its capacity and launched three new flavours. The investment is expected to grow the company’s turnover by over 20%.
The company took out an asset finance plan for new refrigeration equipment, which has significantly increased their storage capabilities.
“We’re a family-run business so it’s great to have the support from Lloyds Bank, which has helped us increase the amount of ice cream we can produce,” says Chow Mezger, joint managing director of Jude’s Ice Cream. “It’s meant we can fulfil new orders and supply more supermarket locations.”
“Being well-equipped to respond to increasing demand is crucial for any business, particularly those producing food items,” says Marcus Carolan, regional manager at Lloyds Bank. “Jude’s Ice Cream has enjoyed a significant uplift in sales, and we were able to provide a tailored asset finance product, which is now allowing the business to continue to raise its annual growth targets.”
