Crisis, what crisis?

World money markets haven't seen the like of this for years. In the wake of the sub-prime fiasco, lenders belatedly seem to be falling over each other to show just how risk-averse they have become. As inter-bank lending rates soar, there are real fears that lending will seize up. Despite the March injection of more than $200bn by the world's central banks to ease the impact of the credit crunch, the dollar has still hit record lows, a US recession looks inevitable and stock markets across the world yo-yo with every new announcement. And, with the default of investment fund Carlyle Capital Corporation, the sale of Bear Stearns at a bargain basement price, and rumours of other collapsing investment banks, the despondency is rubbing off on UK commercial sectors. In the last month, two manufacturers have told me they are postponing MBOs, and three more are reining back on expansion programmes because they don't think it's a good time to be looking for investment. So should they be worrying? Let's hear it straight from the horses' mouth. First, Ray O'Donoghue, national director of UK manufacturing at Barclays says: "As far as Barclays is concerned, we are open for business. For those with the right plans and strategies, the money is most certainly there." Next, Catherine Martin at Lloyds TSB who, as head of large corporate, specialises in the manufacturing sector: "We have consistently assessed businesses by looking at the management, where they want to go, how they are going to get there, and the strength of the balance sheet. And nothing has changed for us. A good deal six months ago is still a good deal now and we have the capital behind us to support them." Sub-prime provision No-one's pretending the garden is rosy, but it's a sign of the times that, in comparison to HSBC's eye-watering write down of £8.7bn, Barclays' (£1.6bn) and Lloyds' (£280m) look positively modest. "Yes, we did have exposure to the sub-prime market but we still showed good profits," declares O'Donoghue. "No-one likes to provision that amount but the bank still traded well. Sub-prime has taken liquidity out of the global markets, but it hasn't impacted day-to-day business in the corporate banking arena for our manufacturing clients. And it is still a very competitive market with a lot of money chasing the right propositions." Lloyds TSB's Martin admits this comforting picture is not uniform: "We see a tightening of appetite across the piste for lending. But when you see what has happened over the last few months, it's probably no surprise that focus has changed for some of the other banks since their capital positions have been affected." Do we believe 'em? On balance, yes - for a very good reason. These two banks, along with a few others like Bank of Scotland, have made significant efforts to build long-term relationships with the manufacturing sector. They have spent time learning about it and work through dedicated manufacturing specialists. As a result, their lending has proved both careful and profitable. With other revenue streams in turmoil, they are hardly likely to rock one of the steadiest sectors in the portfolio. O'Donoghue says the industry focus gives Barclays a lot of data to benchmark businesses: "We can have a good debate and make an informed decision, even if we haven't been their banker. We also keep an open dialogue with customers we would like to bank. We follow them almost as diligently as their own bank." But he admits it is a lot harder with unknown companies. "We use the same types of criteria, but we do look more closely. A lot of it comes down to management. When you have worked with someone you know their style and their reactions with risk. You can't underestimate relationships in banking - you need to be able to trust people in good and bad times, and that works two ways." It's probably not a rerun of the 1990s when companies found the financial umbrella had blown inside out just when they needed it. But it's still not going to be easy for the newer or riskier enterprises, which may still need to look elsewhere. And if 'elsewhere' means the equity financiers, in the current cautious climate that could be a very tough sell indeed. This is where the asset based lenders (ABL) often come into play. In essence, they use the value of outstanding invoices and other assets including plant to release working capital on an ongoing basis. Although most of the banks also provide these services, the specialists often claim more generous lending because they have better asset disposal routes should the business fail. O'Donoghue sounds a note of warning: "Manufacturing lends itself to ABL because it is asset rich. But it doesn't suit everyone. If you go with a pure ABL, you have to understand that it is a highly structured product. If you want to change the terms of that structure - say you want to ship the assets abroad or even repay early - it can be very expensive to unwind. Whereas with a traditional overdraft or loan you can extend it, shorten it or repay it with flexibility." Giving the nod Venture Finance, however, claims it simply says 'yes' more often than other lenders. It currently handles over £3.5bn annually in client invoices and has also lent over £16 millon through the government's Small Firms Loan Guarantee (SFGL) scheme. Its support for office furniture manufacturer, DBE Products, typifies the kind of 'mixed bag' commonly provided by ABLs. Established in 2006 after the existing management team bought out the UK operations of a US manufacturer, DBE began sourcing stock from other suppliers alongside the previous US products. Sales grew by nearly 70% and it took on more people. As, however, its business in Europe and the Middle East grew, it needed help with its cashflow and export business - and its previous financier wouldn't play ball. Venture created a useful financial buffer at both the buying and selling ends of the business. It used domestic and export factoring, which pays a percentage of the value of its export invoices as soon as they are raised, in conjunction with its Trade Finance product, which provides import protection. By paying a supplier direct, or opening a letter of credit, Venture can fund between 80 and 100% of the cost of goods, plus duty and VAT. DBE also took a stock loan guaranteed under the SFGL. MD Andy Dunkley says it "has freed us from the stress and hassle of having to chase payment from overseas customers in different languages and under different business laws. We now have the time and confidence to concentrate on growing our business." Starting a business is often the toughest thing. O'Donoghue doesn't underestimate the difficulties: "If all you have is an idea, and you need money to back it, it's traditionally one for the VCs [venture capitalists] with the banks providing working capital. And in the equity market, it can be easier to raise larger than smaller amounts. Government funding or business angels are there to help get small businesses started. The equity gap has been filled to a degree by private investors. But people have become a lot cuter about the type of funding they want and where to get it. I haven't had many come to me saying they've got a great idea that they have failed to get off the ground. There's usually somebody out there if it is good enough." It's not a view shared by Business Link advisor Laurence Thomas. "There is certainly a dearth of early-stage, low level risk capital. There aren't enough business angels to come in for the higher risk business propositions. If you need and deserve £2m, you will probably get it but, if you need £100k, no institutional investor is going to play other than through government funds." He says it's an imperfect market that either relies on personal connections or on a small number of business angels' networks. If the investor with a taste for your type of business doesn't turn up for a general 'meet and greet', you may never find him. Business Link is probably the single most valuable source for anyone starting out or expanding a young business. It gives sound business advice to any SME with fewer than 250 employees. As Thomas points out, this can occasionally boil down to a simple 'don't do it'. But it can also mean working with a skilled advisor to produce realistic business plans, weigh up the financial options, and introduce sources of seedcorn funding, grants and lending. Thomas says it can close the equity gap "between the level where business angels get scared - about £250,000 - and where the VCs will get out of bed at around £2 million." It can also introduce borrowers to lenders operating the SFGL, although Thomas points out its major drawback: it only applies to companies under five years old. Because it is regionally based, Business Link is in a position to discover and exploit geographically based opportunities, like grants from regional development agencies and, equally importantly, to forge bonds with regional lenders or with those operating in a specific area of manufacturing. And some of these can be very useful indeed. Take, for example, a £2 million co-investment programme launched by Bank of Scotland Corporate's Growth Equity team and Oxford Investment Opportunity Network (OION) to fund innovative early-stage technology businesses. The bank will match funding made by OION and its sister networks, typically at between £25,000 and £250,000 per deal. Or look at the work of South Yorkshire Investment Fund (SYIF) whose remit is specifically to close the equity gap for start-up or early stage manufacturing and service businesses working or relocating to its area. Both the European Regional Development Fund and Yorkshire Forward are investors in the fund, which also provides access to local business angels. SYIF recently provided Rotherham-based PMS Diecasting with a £150,000 investment to increase production and to break into new markets. It had just won a contract to manufacture die-cast zinc components, but needed to buy technology to produce 27 million wire tensioning and joining components, increasing to 35 million in 2008. It also wanted to expand into the window fitting industry. SYIF initially loaned it £100,000 to help buy the equipment. MD Gordon Panter says: "It enabled us to step up production on a considerable scale. We now have cutting-edge machinery producing eight components at a time instead of four." PMS used part of the loan to install vision cameras for quality inspection, an essential ingredient of its newly accelerated production levels. It also received an additional £50,000 for the machinery for the new windows market. Now the company is looking to double its floor space to cope with increased business. There is, however, one route that is better than all these put together: a substantial investment that is totally free of interest. Bank of Scotland Corporate has just launched the second Entrepreneur Challenge with a total fund of £35 million. Taking place across seven regions, the winning entrepreneur from each will receive a funding package of up to £5 million, free of interest and arrangement fees for three years, allowing each of them to translate their entrepreneurial spirit into concrete business plans. The closing date for entries is 19 May 2008. Visit www.theboschallenge.co.uk. Overall, the picture is not one of unalloyed gloom. Catherine Martin is adamant that companies are still expanding and investing although the acquisition trail has quietened because private equity firms are more cautious. But overall she is convinced that manufacturers are better at thinking about their funding than they used to be. "I am impressed by the UK manufacturing industry's ability to adapt when you consider the threats they have faced in the past few years. But they have quickly realised they need to turn into value-add operations and the good ones are doing it incredibly successfully."