Finance Supplement 2015 by Optic Juice

Finance Realising and releasing asset value

FINANCE

What’s in this report? P2 Introduction Money, money, money... Is it only a rich man’s world? Ruari McCallion finds out.

P4 Show me the money The sources of finance now available to businesses, including SMEs and the ‘Mittelstand’ especially, have expanded and multiplied since 2008. Ruari McCallion reports.

P6 Prime the pumps Business investment is a crucial element of any sustainable economic recovery. Richard Hill, Head of Automotive and Manufacturing at NatWest and RBS explains why.

P8 The rising star Charles Garfit, Head of Manufacturing at Santander talks to Ruari McCallion about building long-term relationships with British business.

P10 Structuring success Chris Hawes, UK Corporate Director at RBS Invoice Finance comments on how the correct financing structure can have a significant effect on success.

Editorial

This report was compiled for The Manufacturer magazine by: Callum Bentley, Editor c.bentley@hennikgroup.com

Design

Martin Mitchell, Art Editor martin@opticjuice.co.uk

Sales

Henry Anson, Sales Director h.anson@hennikgroup.com In order to receive your copy of the The Manufacturer kindly email g.gilling@hennikgroup.com, telephone 020 7401 6033 or write to the address below. Hennik Research cannot accept responsibilty for omissions or errors. Terms and Conditions Please note that points of view expressed in articles by contributing writers and in advertisements included in this journal do not necessarily represent those of the publishers. Whilst every effort is made to ensure the accuracy of the information contained in the journal, no legal responsibility will be accepted by the publishers for loss arising from use of information published. All rights reserved. No part of this publication may be reproduced or stored in a retrieval system or transmitted in any form or by any means without prior written consent of the publishers.

INTRODUCTION Money, money, money... Is it only a rich man’s world?

he credit crunch and consequent nearcollapse of the global banking system had an impact that still affects business today - and from both sides. Businesses are maybe reluctant to borrow having been left holding a large and fat baby of investment when customers cancelled projects. Banks became unable to lend because even they could not raise money and a combination of caution and the need roster then balance sheets squeezed funds for business. But that is changing, as banks themselves actively pursue wider opportunities and new sources come into the field. In this, the final financial supplement of the year our sponsors, NatWest, explain their approach and particularly highlight their Tooling proposition, which is designed to enable suppliers to overcome the hurdle of having to buy equipment that remains someone else’s property. Throughout the series of finance supplements, RBS, NatWest and Lombard have taken the time to explain how the Group’s approach to manufacturing has evolved, and to describe the new R-extended products and services they are offering. It has been an interesting and enlightening experience. In this edition, Santander reveals something of its strategy for business and commercial banking. As Charles Garfit explains, this aspect of the bank’s activities have grown from a small kernel - in the UK, at least - to become a key element of its strategy. It also opens up a world of connections through its network in other countries. If nothing else, the aftermath of the banking and financial crisis has demonstrated the truth of the old saying, that Nature abhors a vacuum. We look at a few alternative sources of funding that have emerged over the past few years, from crowd funding to pension-backed lending and bridging finance. There is something for everyone, somewhere, but some solutions have to be handled with care - and all of them should be the subject of expert advice. We hope you have found this series useful or at the very least, enlightening. The banks assure us they are eager for your business; UK manufacturing needs to invest to improve capacity, productivity and competitiveness. It should be a match made in heaven! On behalf of everyone at The Manufacturer and Hennik Research, I wish you the very best for the Festive Season and a happy and prosperous New Year. See you in 2015.

SHOW ME

the money The sources of finance now available to businesses, including SMEs and the ‘Mittelstand’ especially, have expanded and multiplied since 2008. Ruari McCallion’s fingers have been dipping into a range of pies. hat a difference six years makes. In 2008, bank lending pretty much ground to a halt. Across the entire advanced industrialised world there was no escape. Unless you were very lucky, bank lending was something to reminisce about, rather than to discuss with your local branch in the morning. But Nature abhors a vacuum; various other lending sources have emerged over the past five years. Some are familiar but have expanded their ideas and maybe shifted their positioning and exposure; venture capital and ‘investment angels’, for example. But

some are genuinely new, such as peer-to-peer and crowdfunding. The high street banks’ offers have extended, with more creative use of asset financing becoming something to talk about, for example, as NatWest and Lombard make clear in this supplement. New entrants have arrived on the scene as well. Santander, the Spanish-based international bank, is extending to SMEs some products and services that were previously the preserve of large companies. Fierce competition should be good news for businesses. With interest rates remaining at extraordinarily low

Bridging finance has been described – perhaps cruelly – as ‘payday loans for SMEs’ 4

levels, it could be said that there has never been a better time to borrow and competitive pressures from overseas mean that there really is a great need – but there is anecdotal evidence that SMEs are still finding it hard to raise money. It may be that it is time to look at different approaches. “The vast majority of SMEs utilise asset finance of some sort – be it to purchase kit and equipment to vehicles and cars – usually to preserve cash flow. If anything, cash is tighter in SME space so in my view there is even more need for asset finance,” says Cennydd Thomas, corporate finance manager at UHY Hacker Young. His company sponsored a report, published in August 2014, which found that bank lending in the UK remains well behind the G7 average. It was actually down by 2.2% even over last year. Greater regulation as having an impact; banks are required to hold more capital, which simultaneously squeezes available funds and makes them more expensive than would previously have been the case. UHY’s research indicates that larger companies have turned to the Bond market; the volume of bond lending

FINANCE Show me the money

in the UK has risen 35% since 2010. Unfortunately, this is not a route that is generally available to SMEs as the advisory and other fees can be prohibitively expensive. Bizarrely, net lending to SMEs by banks involved in the Funding for Lending Scheme actually fell, by £700m in Q1 2014, compared with the previous year. Thus the trend towards asset finance, in which funds are raised against assets – in short, HP or leasing. To be fair, the banks are widening their definitions of ‘acceptable security’ and such things as tooling are now on the list. If a company is high-growth, it will have intellectual property (IP). It is perhaps difficult to quantify exactly how much IP is worth; in the case of Apple, the computer manufacturer, the answer is, literally, ‘Billions of Dollars’. But what about smaller companies, who may have a great idea – and the patent to prove it – but have not been able to find conventional sources that would lend against it? Who would be prepared to support something that you know the value of? The answer could be: you. Or rather, your pension scheme. A company called PrisymID, a medical labeling specialist, was recently recognised with a Queen’s Award for Enterprise. However, in 2007 it was richer in ideas than in available capital. It had been in administration, then was the subject of a management buyout (with the help of invoice discounting) and had built turnover up to £4m. While it had the faith of its owners, it did not have the financial resources to develop its key IP asset: its software. The director/ shareholders took a big risk and invested

their pension funds into the business, under the guidance of a company called pensionledfunding.com. The mechanism was that the company established a Small Self-Administered Pension Scheme (SSAS) and had the IP independently valued – it still had to be a commercially justifiable arrangement. The SSAS injected £300,000 into the company and a further tranche two years later, to fund new product development. The pension itself bought the IP, which became an asset of the fund and the company then had to pay to use. Other companies have used loans, but whatever the chosen route, the directors are effectively repaying themselves and boosting the value of their pension funds as well. Since 2007, PrisymID’s turnover has risen to over £7m, with £10m forecast for 2014/15. It now has an office in Boston, Massachusetts, USA and has no dependence on external funding at all. Taking independent financial advice is vital – it is not suitable for every business – but SSAS arrangements are far from new. A pension fund – or collection of individual pension arrangements (IPAs) from a group of directors – with a total minimum value of £50,000 is required. It is often overlooked; research commissioned by Clifton Asset Management in 2012 found that nearly three-quarters of businesses and their regular advisers were not even aware of pension-led funding. Other sources that have gained higher profiles of late include peer-to-peer and crowd funding. The sector is young and the projects have tended to be quite small; there seems be a lot of excitement when a fundraising exercise reaches £10,000! There is also the question of regulation, which is a novel experience for this sector. Up to £50,000 per project may be available. Bridging finance has been described – perhaps cruelly – as ‘payday loans for SMEs’. It’s a sector that has more than tripled in size over the past three years, according to West One Loans; around £400m was reportedly borrowed in the year to September 2014. It is short-term funding, most appropriate for a clear-cut, single transaction. It is secured, usually on property, and comes

With interest rates remaining at extraordinarily low levels, it could be said that there has never been a better time to borrow and competitive pressures from overseas mean that there really is a great need – but there is anecdotal evidence that SMEs are still finding it hard to raise money with high interest rates, arrangement fees and the possibility of some hefty penalties in the event of failure to pay. It can help see companies through shortterm squeezes, such as bridging the gap before settlement of a large bill, for example, although invoice financing may be cheaper. Bridging finance is most definitely not an alternative to overdraft and it can even make a balance sheet look less attractive. It has its place – most things have – but handle with care. Non-loan sources of finance can include venture capital but there are various grants available as well. If your company is heavily into innovation and novel research, then the EU could have just the thing for you. Horizon 2020 has the thick end of €80bn available between this year and 2020, plus additional private funding. The website says that it has an “…emphasis on excellent science, industrial leadership and tackling societal challenges” and promises that it has “…a simple structure that reduces red tape and time”. If you’re a small business with big ideas – what are you waiting for? http://ec.europa.eu/programmes/ horizon2020

Business investment is a crucial element of any sustainable economic recovery. Richard Hill, Head of Automotive and Manufacturing at NatWest and RBS, explains why it is important for manufacturing companies to invest to maximise their capacity and their potential.

EF, the Manufacturers’ Organisation, recently released a report (sponsored by, Lombard – part of the Royal Bank of Scotland)1 that looked at the current situation and investment intentions of engineering companies in the UK. One fact in particular stood out: with the exception of a five-year period before the onset of the financial crisis, annual levels of investment spending in the UK have been pretty much flat since the late 1990s. Total UK business investment in 2013 was £123.6bn: 8.1% of annual GDP. While that may look impressive, when set against the economy as a whole and measured against competitors such as Germany and the USA, it is not – and it is lower than it was in 2008. The first question is: does it matter? The answer is a very definite yes.

Investment is necessary in order to increase capacity and raise – or even simply maintain – competitiveness. The period since the turn of the Century has seen huge advances in technology, which simply cannot be ignored if business is to remain globally competitive. We are all aware of the advantages the Far East has enjoyed over the past few decades. These have been heavily based on low wages and that particular advantage is being eroded but business in the UK will not be able to redress the balance if it is not able to compete effectively with other countries, which have invested in automation and advanced equipment. A manufacturing forum that we held with experts across the industry, found that there is increasing pressure from OEMs for the Supply Chain (SC) to invest; it is essential that capacity in

1 “An Uncertain Return” – Investment Monitor 2014

KTC (EDIBLES) LTD SECURES £33 MILLION FINANCING K

TC is a £200m turnover business with 220 employees, operating from manufacturing sites in Wednesbury (its HQ) and Liverpool. Its flagship brands, KTC and Sea Isle, are familiar to Asian and Afro-Caribbean consumers both in the UK and through its important export arm. RBS Invoice Finance supported the businesses provided a complete funding package including a £33m Asset Based Lending (ABL) facility, transactional banking, import letter of credit and bonds and guarantees. The ABL facility consists of working capital and term loan funding against the company’s Receivables, Inventory and Property. The package is enabling KTC to support its growth strategy.

FINANCE NatWest

There is evidence of caution about commitment to large projects among engineering companies, or even of nervousness – which is not altogether surprising various areas, including technical and physical, should be increased in order to facilitate partnerships in product development and innovation. Currently, it appears that 40% of the UK SC is actually ‘ungeared’. There is evidence of caution about commitment to large projects among engineering companies, or even of nervousness – which is not altogether surprising. Part of the challenge in building confidence to invest for future growth, for RBS and other banks supporting businesses, is how to encourage stillcautious companies to invest. We have worked hard to develop a number of innovative ideas and funding methods in order to break out of the traditional approach and to make funding more responsive and appropriate to customers’ needs. Earlier this year we developed our Tooling proposition - specifically to enable manufacturers to obtain the bespoke tools required to complete specific contracts. Something that had been identified by the industry as a very significant factor restricting cash flow. Typically the supplier is expected to fund new tooling components specified by manufacturers, however the tooling and intellectual property is ultimately owned by the car manufacturer – making tangible security for any loan difficult. The proposition utilises the bank’s trade finance expertise and specifically a trade loan structure. The trade finance team will tailor the loan based on the schedule, contract and various stages of

NUTRAHEALTH PERKS UP WITH £20 MILLION FUNDING DEAL N

utraHealth PLC, founded in 2004, is one of the largest manufacturers and distributors of vitamins, minerals and supplements in the UK. It sells directly to consumers and supplies the country’s major multiples and independent health food stores, along with international pharmaceutical and multi-national corporations.The Kings Norton, Birmingham-based company exports to more than 70 countries worldwide. It employs over 350 people at production sites at King’s Norton and Swadlincote, Derbyshire. Its funding arrangement and refinancing package, which includes a £15m lending facility from RBS Invoice Finance, is enabling the business to boost sales of over-the-counter pharmaceuticals, to increase exports and to launch new product lines under its BioCare, Natural Wellbeing, Brunel Healthcare Manufacturing and Max Healthcare brands. Additional support was provided by Lombard, the bank’s Asset Finance arm, Lombard.

the tooling manufacturing process. The team will monitor and control the loan at every stage of the tooling manufacturing process – paying the tooling manufacturer as necessary at key stages, on behalf of the bank’s customer. A production line is an expensive piece of infrastructure and the bank’s response has to be tailored to suit the real world. There is a lot going on and we may not have come up with a definitive answer and for that reason we want to hear from the industry. For example, is the traditional five-year term for purchase of capital equipment, with residual value at the end of the term, viable these days? The traditional metalforming business would have equipment that would be used to form metal in one way or another over a long life – but as OEMs in a number of industries move towards lighter materials, the need will be for a whole different range of equipment, and shorter working life. We have been asked for longer financing periods, which could have the effect of reducing repayments and thus improving cashflow – but we are aware that our customers may want to pay back as soon as possible. The tax regime is not as accommodating as it once was and that, too, will have an impact on how businesses want to be financed. We have invested in training our own staff and in raising their skill levels and

we continue to do so with our specialist Manufacturing Relationship Managers based across the UK. Industry is moving at accelerating pace an we are seeing changes in industrial cycles – they are getting shorter and we as an organisation are working to find ways to meet our customers’ requirements in today’s circumstances, not those that existed a decade and more ago. We are looking ahead and seeking to develop ways to predict customers’ asset needs two or three years from now, in the context of developments that are being worked on now. The Tooling proposition is an example of our response and we are working to anticipate future needs, rather than just to react to them.

Star

THE RISING

There is a new kid on the UK’s corporate banking block and it has taken aim at the crowns of the Big Four. Charles Garfit, Head of Manufacturing at Santander, talked to Ruari McCallion about building long-term relationships with British business.

he changed landscape of the post-2008 financial services world has seen a new star rising in business banking. While Santander built its presence in the UK with the acquisition of three former building societies – Abbey National, Bradford & Bingley and Alliance & Leicester – it has extended its business well beyond the domestic mortgage market. It has a clear and well-planned strategy for developing a strong presence in the corporate and commercial sector. “Alliance & Leicester had a corporate and commercial banking operation – it held one per cent of the market,” said Charles Garfit, head of manufacturing. “We have been steadily building our commercial business in the UK, with the intention of mirroring our global position.” Santander has strong representation in Spain, Latin America, the East Coast

states in the USA, Poland and Germany. That international presence is something it believes is important for its growing corporate client base.

A global brand While the companies Santander acquired in the UK all had strong brands in their own right they were not positioned where it wants to be seen, as a broad-spread, business bank. “The Santander brand is known globally; rebranding in the UK reflected the need for unification,” he explained. So what does Santander

have to offer manufacturing business in particular? The same as the established banks are offering or something else? “We provide a wide range of products and services, of the sort you would associate with commercial and corporate banking. Our online Connect Internet bank solution gives customers access to their accounts from their computers,” he said. All present and correct, so far. “We offer competitive invoice and asset finance products and what we offer manufacturers in particular is a broad understanding of the vast array of plant and machinery they require. My team is made up of people who know the right questions to ask.” He went on to assert that Santander’s dedicated asset managers enable the bank to talk to both suppliers and manufacturers and to build a deeper understanding of the customer’s business and thus to determine the right solutions for them. “We also look at the out-turn and the ways that an investment will help the customer to increase output and profitability. We always endeavour to truly understand its impact and effect,” Garfit said. To be fair, all the major banks are saying pretty much the same thing; it is when he explains the makeup

We can connect our customers with buyers of products and vendors of raw materials, across the globe

FINANCE Santander

“Santander can connect our customers with buyers of products and vendors of raw materials, across the globe,” he explained. It gets better. “This is a service that is free to all our commercial customers.” And there’s more. The bank takes customers on trade missions – it recently took a group of company representatives to Brazil and introduced them to appropriate buyers, a significant number of whom were Santander customers as well. Quite a few of the delegates came back with firm orders, secured during the trip.

New approach, new products “Our common global identity helps to establish trust and to overcome potential sticking points,” said Garfit. Obviously, creditworthiness is important, as is security in the case of lending. But he says that his team of his team that one begins to get a wants to spend the right amount of different flavour. As Santander UK time with prospects and customers in did not have a large corporate and order to build relationships, to properly commercial infrastructure it had to understand customers and their recruit personnel from outside. It has businesses. “That enables us to help looked for individuals with particular them achieve their personal ambitions skills and attitudes and also gone for as well as the ambitions of the business people with experience of industry and they run.” Its products are also tailored related activities – Garfit himself was to the manufacturing customer base a consultant, for example - and then and the offer may go a bit further than trained them how to do banking. some competitors. Take something The knowledge called ‘reverse factoring’, for example. “We will pay your bills for you, in “Over a five-year period we have advance of when settlement is required. been recruiting hand-picked people Our customer gets the benefit of for relationship banking,” he said. improved cashflow and it may enable Relationship banking is a phrase them to negotiate better terms,” said that one likes the sound of but the Garfit. “This is pretty normal for FTSEreality does not always match up to 100 companies but we offer it to all the desire. “We now have around corporate and commercial customers.” 700 personnel based at 60 business Subject to status, of course. He is centres across the UK. Our training is also proud of the fact that credit aimed at increasing their knowledge colleagues are based in regional centres and skills. We have been working – that is real people making decisions; with the Warwick Manufacturing “Computer says no” is not something Group, for example.” a Santander commercial customer will Santander’s fundamental belief is have to endure. that the purpose of the bank is to help Santander is particularly focused its business customers to evolve, not simply to grow. It will actively encourage on helping fast-growth businesses. Its ‘Breakthrough’ initiative aims to identify, them to seek out new markets and new territories. In that context, its international nurture and support emerging business leaders. The ‘Masterclass’ feature offers presence is a distinct benefit.

It has recruited from outside banking, looking to people with experience of industry participants site visits and the chance to benefit from others’ knowledge and experience. Breakthrough organises at least two ‘live events’ per region, which cover current and anticipated challenges and contributions from shared experience of larger companies. The Internship initiative helps to match high-quality graduates with SMEs that could beneﬁt from their skills. There is even a section on corporate social responsibility. The right elements are tailored to each customer. Of course, it is a banking offer so funding is a core element – but it’s more than an ordinary secured loan. “It incorporates tooling, assets such as machinery, buildings, and so on,” he said. “And we don’t just look at the business as it is today; we look at where it will be after the investment.” A phrase that he repeats often is ‘grown-up conversation’. Santander’s approach to corporate and commercial banking is firmly rooted in knowledge, in-depth assessments and thorough understanding. It can lead to terms in asset finance that are more suited to the broader situation than the formula, for example. “The good thing about the manufacturing sector is that all manufacturers are different; they have their own characteristics and nuances,” said Garfit. “We believe in human intervention at all levels. We will have grown-up conversations about assets, customers, value of projects or investments, longevity and the value an investment brings to a business. We believe what sets Santander apart is that relationships are the cornerstone of our business.”

FINANCE RBS

STRUCTURING

success Having access to sufficient working capital is vital. Chris Hawes, UK Corporate Director at RBS Invoice Finance comments on how the correct financing structure can have a significant effect on success.

strong financial structure can provide the liquidity needed to grow, adapt, and make acquisitions or to simply help to manage day-to-day trading requirements. Asset Based Lending (ABL) is emerging as a more mainstream lending solution and enables businesses to borrow against the value of their trade receivables and inventory to finance the working capital they need. It’s ideal for manufacturers and distributors for example, who often have to invest in materials, inventory, new plants or technology, months before payment is made, and during which time cash flow may be restricted.

RBS Invoice Finance has shared a strong working relationship with SCC since 2010 and has provided an increase in the company’s existing Asset Based Lending facility 10

Initial funding lines are set up to accommodate the highest required funding peak in a firm’s 12 month forecast. This means you operate with headroom that is appropriate - having access to working capital when you need it without having to slow your business growth or raise equity. It is flexible and agile because it is linked to your assets and access to funding is quicker because there is no need to reapply as your requirement grows, so long as your assets cover it, your funding line is there. This provides added confidence when seeking out new contracts and the ability to take swift action when buying, which could also give manufacturing firms the freedom to take advantage of deals decisively. One manufacturer who has used ABL to support their growth is North Wales based South Caernarfon Creameries

(SCC). The business has recently won a number of blue-chip contracts requiring significant investment in their manufacturing operation in North Wales. SCC closed its liquid dairy in 2012 to focus on cheese and butter production, which is proving an invaluable strategic decision. Increased demand means that SCC can justify a substantial investment in its Gwynedd site at a proposed cost of £8.5m. Phase one is underway and set to complete by mid-2015 and is being funded through a combination of an increased Asset Based Lending facility and a Welsh Government Grant. Phase two is scheduled for completion in 2018. RBS Invoice Finance has shared a strong working relationship with SCC since 2010 and has provided an increase in the company’s existing Asset Based Lending facility against receivables and inventory together with a term loan to support the plant modernisation which is set to be fully operational in the summer of 2015. The new contracts secured are projected to increase SCC’s annual turnover from £30m to £60m, transforming the future of this Welsh farmer-owned dairy co-operative. Robert Burgess, finance director at SCC explains: “Reinvesting in new facilities is critical to our future growth. We need additional capacity to keep ahead of modern retailer demands, and to achieve best in class operating efficiencies and yields; if you don’t, it limits your growth. The proposal from RBS Invoice Finance was fairly priced and the transparency it gives both parties is excellent – it is working extremely well. Without their support to increase our asset based lending facility all of this would have not been possible and I am extremely grateful for RBS Invoice Finance’s ongoing support.” Paul Morgan, RBS invoice finance corporate manager, added: “Our existing asset based lending facility and close working relationship with management at SCC has given us a good understanding of the business and the working capital and investment challenges it brings. Alongside the Welsh Government Grant we were able to structure a bespoke asset based lending facility, taking into account the value For further information of SCC’s receivables please contact: and inventory as well as its land and buildings to Chris Hawes provide the support the UK Corporate Director at business needs. We are RBS Invoice Finance absolutely delighted to Tel: 020 7672 2593 be playing our part in Email: christopher. helping SCC take the next hawes@rbsif.co.uk significant steps in www.rbsif.co.uk its expansion.”