Key considerations

From oil rigs to helicopters and passenger aircraft to advanced civil engineering structures, high-tech electronic devices from Dorset-based Sherborne Sensors are to be found measuring load, vibration, stress and acceleration. The fast-growing business, it turns out, is a global leader in the manufacture of high-precision sensors for industrial, military and aerospace applications – and business, in short, is booming. "We experienced unprecedented global success in 2010 and, with a host of new products in the pipeline, we're looking forward to further growth in 2011," says managing director Mike Baker, noting a 63% increase in sales orders. But Sherborne, like the rest of British manufacturing industry, is operating in a newly-changed world. In the wake of the credit crunch, banks – once normally ever-ready to fund expansion and capital expenditure – have pulled tight the purse strings. And despite high-level government intervention, and supposedly-harsh conditions tied to billion-pound bank bailouts, reports from the front line indicate that getting funding for investments can be incredibly difficult – or even impossible, at any price. "Banks are much more cautious than they used to be," says Alan Wood, managing director of high-tech radio equipment manufacturer Wood & Douglas, a £5 million business based near Basingstoke. "You have to go further up the line for sign off, and they always want security." And for 'security', of course, read the keys to your house if the venture should go wrong. Certainly, he reports, a hoped-for £200,000 investment in the latest surface mount technology is untenable at the moment: for the time being, it seems, the traditional silk screen process will have to suffice. "We make astute investments when and where we can, but a replacement is a 'tomorrow' item of expenditure, not a 'today' one," says Wood. In short, there's something of a sea change underway in how British manufacturing industry approaches capital expenditure and investment. From investments in new forklift trucks to machine tools, and from shopfloor computer systems to handling equipment, British business is having to get inventive. "The present economic situation is forcing companies to take a fresh look at the lease-hire-buy decision," says George Acris, head of business development and marketing at Microlease, a leasing rental and contract hire specialist in the field of factory test and measurement equipment. "Even in companies where purchasing was very much the established norm, it's now the case that companies are looking at the alternatives to outright purchase." "We're starting to see a change in attitude towards financing IT purchases, particularly in the manufacturing sector," affirms Simon Macpherson, senior director of business development at workplace time and attendance system vendor Kronos. "Many of our discussions with manufacturers are now around lease finance options: raising money from the banks to fund new equipment has become more difficult, and manufacturers are therefore having to set aside cash reserves to fund these purchases." Take Sherborne Sensors, for instance. "We're a very conservative company, and instinctively a 'let's own it' type of business," says Mike Baker. "Once it's bought, it's bought – there's no point paying lease interest and monthly payments if you don't have to. Instinctively, we save for what we want, and then buy it. There are times when we break that rule, but only with a great deal of thought." Accordingly, companies offering alternatives to the traditional buying route have to engage in something of an education process, as they work with customers they might never have got into discussions with before. At forklift and heavy equipment leasing provider Hitachi Capital Business Finance, for instance, head of sales Marie Dunkley is encountering a regular flow of potential customers with what is becoming a familiar line of questioning. "They say, 'We'd normally buy, but now we're taking a fresh look at it,'" she says. "They want to know the difference between leasing and hire purchase, and what an operating lease is. And they've got questions about what happens at the end of the leasing period, and if they can extend the lease, and what options there are for early payment if they so wish." And in the process, she adds, they're discovering that alternatives to buying – while admittedly locking a business into the need to make regular monthly payments – are not without some advantages. Such as liquidity, for instance. "Cash has become king again, and companies want to keep it within the business," she says. "Once, they might not have thought twice about writing a cheque, but now they see the amount of cash that the cheque represents and are looking at alternatives." Predictability of costs is another potentially attractive benefit – especially in terms of straight rental leases or operating leases, where there are no complexities of residual values to consider. "There's budgetary certainty: you know your payment schedule for three or five years ahead, without the need to worry about maintenance or repair charges," explains Peter Jones, finance director at Briggs Equipment UK, the UK distributor of Yale Materials Handling products. "Better still, without the large upfront payment that a purchase represents, you're spreading your asset payments over the period that the asset is generating income." "Leasing eliminates uncertainty," adds Alex Baldock, managing director of asset finance business Lombard, part of banking giant RBS. "Fixing the costs and the applicable interest charges for the duration of the contract helps a business plan for the future by eliminating uncertainty and costly surprises." The asset finance market has had a torrid time over the past four years, says Tracy Ewen, managing director of IGF Invoice Finance. But for IGF, it's been good business – very good business indeed. "I can honestly say that we've seen clients who just wouldn't have come to us before – because they have been turned down for asset finance. We've had companies coming to us, saying, 'The banks are being very procedural; we don't tick all the boxes – and so we've been turned down'," she says. "And with finance not available elsewhere, they've decided to take a fresh look at invoice finance." Invoice factoring isn't new, of course. And it hasn't always been popular, as manufacturers have resented giving away precious margin to banks. But times, it seems, are different. "There's been a real change in the market," says Ewen. "Never before have I seen so many companies fearful of borrowing money. And of course, we aren't lending money: what we are doing is simply giving companies earlier access to their own money." And, even as traditional financing avenues continue to dry up as the impact of credit crunch continues, equipment vendors and leasing firms alike are innovating their finance offerings to further extend the alternatives to equipment purchase. Industrial compressor manufacturer HPC Compressed Air Systems, for instance, has joined giants such as aero-engine manufacturers Rolls-Royce and General Electric by offering 'power by the hour' rental schemes – with the power in question, of course, being the motive power of compressed air, and not the thrust generated by an aircraft engine. Dubbed 'Sigma Air Utility' by the firm, the idea is to put compressed air on the same pay-as-you-go basis offered by electricity, gas and water utilities. In short, it's a way of hiring a compressor, but paying for just what that compressor delivers, rather than simply for its calendar month availability. "It's a very cost-effective way of financing a compressor, as you pay only for the compressed air that you use," says HPC technical manager Phil McArragher. "What's more, the use of the very latest advances in air system technology also ensures maximum air production and energy efficiency – so it's even cheaper." Forklift truck provider Briggs Equipment, meanwhile, reckons to have developed a flexible alternative to the traditional, rigid, long-term lease rental agreements that can lock manufacturers in to leases that are no longer appropriate. Such an offering certainly seems to have benefited Pontypool-based automotive products manufacturer Trico Products. Following the introduction of larger shipping containers, explains Trico operations manager Adam Richards, compliance with safe handling regulations meant that the company's existing lease-rental three-wheel trucks were no longer appropriate. The solution? Simply exchange them for four-wheel trucks – at zero switching cost. "If Trico's machines had been on a standard contract, it would have cost the company to cancel its current contract and begin a new one," says Briggs' sales executive Kane Reynolds. "Opting for our FlexiHire plan has saved Trico £20,000 for the replacement of the new equipment." bankers' myopia At Keighley, Yorkshire-based food-grade packing film manufacturer Arvensis Packaging Films, strong sales growth meant that the business's sole extrusion machine became fully-loaded to capacity in early 2010. The obvious solution: a second machine, at a cost of £1.5 million. But a conversation with the bank proved off-putting, recalls managing director Andy Bairstow. "Banks don't really understand specialised industrial plant and equipment," he says. "If it's got four wheels on it, they understand it. Otherwise, they tend to shy away – especially now. In short, they felt it was too risky a proposition, and encouraged us to go elsewhere." Elsewhere, in this case, meant asset finance specialist Lombard, with which operations director Stephen Dowe had previously had dealings. Not only was Lombard happy to offer a competitive package, he notes, but it also proved flexible in terms of the commencement of payments. "Lombard realised that although the machine would be delivered in October 2010, it could be up to six months before it was fully commissioned and generating revenues," he says. "From that perspective, the low start-up repayment rate that they offered was extremely attractive." And in contrast to mainstream banks' hesitation around putting an end-of-lease value on the extrusion machine, Lombard again proved flexible. "We make the payments for four years – and then we'll own it outright," sums up Bairstow. buy, hire or lease: a primer If you've got the cash, or are comfortable parting with it, then many businesses still prefer to buy outright. The logic? Once an asset's paid for, it's paid for, with no need to worry about making future payments. However, as Sherborne Sensors' managing director Mike Baker notes, that's always assuming that a business hasn't got anything more profitable to do with the money. And if it has – overseas expansion, new product development or a range extension, for example – then buying takes second place to other options. So what are the alternatives? If the requirement is very short term in nature, a simple traditional rental solution may be best. It's not the cheapest option, but the formalities are fewer. Longer term, though, leasing is the way to go. Lease rental can be regarded as an extension of hiring. Operating leases are conceptually very similar to rental leases, but are associated with assets with a long life. There's a fixed term – three years, five years or whatever – and payments are fixed. Maintenance and repairs are generally included in the package, too. But at the end of the term, the payments cease – and the asset is reclaimed. Want to own it at the end, as with a hire-purchase agreement? Then lease purchase is the way to go. There are monthly payments, with a final payment related to the residual asset value.