TM Finance supplement 2013 by Optic Juice

FINANCE Realising and releasing asset value

FINANCE 2013

What’s in this report? P4 Making the right choice RBS shows its support for a greater mix in the finance market, highlighting key initiatives and partnerships which allow companies to raise both debt and equity according to their needs

P7 Hot property Asset finance provider Lombard shows how asset finance can bring together the business case for investing in energy efficient equipment which reduces the long term costs of industrial property

P8 Upwards and onwards Siemens Financial Services explains why using asset finance to fund capital investments makes sense in a credit squeeze

P10 The asset-light touch Maxxia’s CEO shows how the rise of assetlight outsourcing models impacts on the way manufacturers should calculate the useful life of their assets and fund their replacement

P13 Take your pick A new CBI report highlights the range of alternative finance options available to UK businesses

Editorial

This report was compiled for The Manufacturer magazine by: Jane Gray, Editor j.gray@sayonemedia.com James Pozzi, Reporter j.pozzi@sayonemedia.com

Design

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

Sales

Henry Anson, Sales Director h.anson@sayonemedia.com Joe Green, Sales Executive j.green@sayonemedia.com In order to receive your copy of thec The Manufacturer kindly email g.gilling@sayonemedia.com, telephone 0207 4016033 or write to the address below. SayOne Media 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 The UK has one of the most sophisticated global financial centres, but UK finance does not fully serve the needs of smaller businesses.

o began the executive summary of the Breedon report, which was published in March 2012, lurching the problem of how to effectively reform the UK’s lending landscape in the despondent post-financial crisis world into a priority policy position for government. The shock of the financial crash in 2008 immediately spurred international governments to tighten banking regulations and place pressure on banks to build up their reserves. Rightly so. But as a consequence, their ability to take risks has reduced, and with it their ability to lend to business. This is particularly true of European banks, explained a 2012 article in The Economist where there is less diversity in finance sources than in the US, for instance, and where there has been historical reliance on wholesale funding. To try and address this diversity issue, Breedon set out a number of recommendations to government, designed to spur competition. He also recommended that businesses must be educated about new and existing form of alternative finance in order to spur uptake. In its response to the Breedon report, manufacturing organisation EEF took issue with this need to educate, saying that it had found most of its members were aware and had experience of non-bank finance options and chose not to use them for clearly defined reasons. Where EEF did identify lack of awareness and understanding however, was around the likely long term nature of the decline in attractiveness for traditional bank debt as a primary recourse for funding. A year on, access to finance remains a fraught issue. Economic growth is still elusive and, according to a recent report from business body the CBI, conventional banks still provide around 80% of lending to UK business. This report seeks to explain why manufacturers, SMEs in particular, should review their impression of alternative finance options, such as asset based lending and equity investment. The transparency and relevance of such offerings has altered dramatically in recent times say our contributors. Furthermore, even for the most attentive business leader, the last year has brought a host of new additions to the finance landscape and keeping up to date is a constant task. Contributions to this report summarise recent changes to alternative finance options. As the UK seeks balanced growth, it is essential that manufacturers feel confident in picking the right facilities to maximise the value of their company assets, both tangible and intangible, and seek suitably supported expansion. END

Making the

right choice

While positive, the challenge remains whether UK manufacturing is investing enough in these and related areas including new plant, premises, ways to access new markets and indeed the potential for growth through acquisition. Factors such as business strategy and underlying confidence will help to determine when such events take place but a key consideration will always be how these activities are best funded; internal cash generation, debt, equity or a combination of all three.

“Encouraged by recently improving economic data, many UK-based manufacturers have exciting plans for strategic development in 2013 and beyond.” Peter Russell of RBS looks at some of the options for funding available to SMEs and mid-cap organisations.

dentifying and accessing the right kind of finance remains a key consideration for manufacturing businesses that are looking to invest for growth and remain competitive in the longterm. Recent RBS research among High Value Engineering (HVE) firms indicates that 78% described their business as “equipped to face the challenges of 2025” with the same number spending up to 20% of turnover on research & development projects. The objectives of this R&D are varied but are largely targeted at underpinning the growth agenda and include areas such as new production processes, new product development, resource efficiency and materials integration (The Future of UK High Value Engineering, RBS November 2012).

Equity: a fair exchange for added strength Among management teams in many Mid-Sized Businesses, yielding equity in exchange for investment might be considered a no-go area. But with some entrepreneurs and businesses not looking to take on more debt, it’s an option manufacturers may want to consider in 2013. Accessing public markets is not currently a realistic option for many manufacturers so alternative sources of finance are worth considering.

For example, the government’s Business Growth Fund (BGF), with seven offices across the UK, provides an alternative equity route for those looking for solutions to finance the future development of their organisation. BGF invests long term capital in ambitious companies, in return for a minority stake, while also providing expertise and contacts. Operating as an independent company in its own right (with funding from the major UK banks, including RBS), BGF has £2.5bn to invest in UK businesses. Aimed at organisations with turnovers of £5m-£100m (with typical investments of £2m-£10m), BGF provides a new option for senior management teams wishing to retain control of their business, in many instances complementing funding provided by conventional bank debt. If a broader re-balancing of how British industry is financed is to be achieved, it may well be that companies eligible for BGF funding will find the mechanism and benefits appealing, especially those with sound business ideas but without balance sheet headroom to take on extra debt. A key differentiating feature of BGF’s offering – compared with some private equity (PE) options – is the minority equity stake it takes, accompanied

Security may be required. Product fees may apply. ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTAGAGE OR OTHER DEBT SECURED ON IT 4

FINANCE 2013 PART II Royal Bank of Scotland

forms of debt finance. However, by board representation. BGF says traditional loans and overdrafts that investing from its own balance continue to be critical for sustaining sheet also means it is likely to stay development among individual firms with the companies in which it invests and the wider manufacturing sector. for longer periods than some PE firms With interest rates on SME variable might typically prefer. According to rate facilities significantly lower than Mark Bryant, a BGF director, “Those before the recession (according to the individuals we’d seek to be appointed British Banking Association and the as non-executives to boards are senior Department of Business, Innovation & industrialists, business leaders or entrepreneurs themselves, with expertise Skills, or BIS), debt remains a highly and networks they’ll share with company attractive way to fund those activities designed to achieve growth. management.” Companies must meet For SMEs and Mid-Sized Businesses, certain criteria to be considered, but some of the short or medium term lending those who don’t yet tick all the boxes options available today may hold more are not ruled out indefinitely. attraction than others. The nature of BGF funding is by no means a standthe project to be financed, the financial alone option. Already, combinations strength of the company wishing to of bank debt and BGF equity have borrow the funds and, of course, the provided solutions to companies who term over which senior were reluctant to overwishes expose themselves in Supporting UK PLC management to repay, will all be the event of difficult germane when weighing trading conditions. For RBS continues to support up these options: organisations where UK businesses, working equity solutions are with entrepreneurs, appropriate, BGF The RBS Manufacturing business owners and senior funding may represent Fund: Available to UK management teams both a welcome long term manufacturers with in manufacturing but also option that allows turnover of £25m across a host of other them the time and and above to support important industries. freedom to pursue their investment for growth In 2012 RBS: objectives, growing their including R&D, capital business organically expenditure, acquisitions Offered more than £58 or acquisitively as they and working capital. The billion of loans and see fit. Fund benefits from publicly facilities to UK businesses quoted rates and fees for of which more than £30 Lending-based billion was to SME’s. both variable and fixed- ate solutions: a loan alternatives, over three Renewed £27 billion matter of or five years. The fund also of UK business overdrafts, need, strength enables companies to take including £8 billion and purpose a two-year capital payment for SME’s. holiday, providing certainty, Attractive new Provided over 40% of transparency and flexibility alternatives to raising funds accessed via the for cashflow planning. capital can also increase government’s Enterprise capacity to invest. Finance Guarantee For larger Asset-Backed lending (EFG) scheme. companies, some are (ABL): an option to which able to access the debt increasingly more companies Made a 3,500-strong capital via, for example, are turning, enabling them to team of relationship Private Placements access often greater levels managers throughout and High Yield of finance for a variety of the country available to Bonds, both of which purposes, using the fixed support UK businesses. offer longer dated and current assets (including

stock, debtors and WiP where eligible) of the business as security. Enterprise Finance Guarantee (EFG): In 2013, this scheme will continue to finance even more SMEs who don’t have sufficient assets to satisfy the requirements of regular commercial loans where security is required. Available to businesses with turnover of up to £41m, loans of up to £1m come with a guarantee for 75% of the balance outstanding from the Department for Business, Innovation & Skills. Funding for Lending Scheme (FLS): RBS supports its customers by using the Bank of England’s Funding for Lending Scheme to help stimulate credit demand. The RBS Group waived arrangement fees on £1.7 billion of SME loans in the second half of 2012, benefiting over 11,000 SMEs.

Pooling resources, playing to strengths Some manufacturing Mid-Sized businesses may identify benefits from financing investments as joint ventures with other businesses, with everyone bringing something of value to the table, and all parties leveraging from pooled strengths, such as technical expertise, geographical connections or superefficient supply chains. Working with carefully selected partners may provide greater access to finance than might be attained if operating purely on a stand-alone basis, giving confidence to lenders and investors alike. END

By taking advantage of our ﬁnancial skills and dedicated client service, you can concentrate of what matters most: your customers, your company and your people. To discuss how RBS can support your manufacturing business, contact: Peter Russell Head of Manufacturing & Industrials, UK Sector Coverage Tel: 020 7672 1007 Email: peter.russell@rbs.co.uk

Helping UK businesses grow brings its own Awards

We’re delighted to have won ‘Best Leasing and Asset Finance Provider’ five years running, but the sweet smell of success won’t go to our heads. As the UK’s leading asset financier we’re focussed on helping manufacturers fund the capital equipment that is essential to their success. Committed to investing for growth our proactive approach, knowledge and insight gained over 150 years of experience, helped hundreds of manufacturers reap the benefits in incorporating asset finance into their business model. So, if your operation is missing this essential ingredient, call us. Security may be required. Product fees may apply.

Call the UK’s no 1 for asset finance today. Call 0800 028 7315. Typetalk 18001 0800 028 7315. Winner of ‘Best Leasing & Asset Finance Provider’ at the Business Moneyfacts® Awards for 5 consecutive years.

lombard.co.uk Lines are open 9am to 5pm Monday to Friday. Lombard North Central PLC. Registered Office: 3 Princess Way, Redhill, Surrey RH1 1NP. Registered in England No. 337004.

Winner of ‘Best Leasing & Asset Finance Provider’ at the Business Moneyfacts® Awards for 5 consecutive years.

FINANCE 2013 PART II

Hot property

Lombard

lombard.co.uk

Lines are open 9am to 5pm Monday to Friday. Lombard North Central PLC. Registered Office: 3 Princess Way, Redhill, Surrey RH1 1NP. Registered in England No. 337004.

91860.004_Manufacturers Cup Cake 196x276 aw2.indd 1

Rising energy prices, imminent legislation and increased focus on corporate social responsibility make it hard to dismiss the impact of sustainable energy for businesses. Ian Tyrer, head of sustainable energy finance at Lombard considers the effect of these factors on property costs for manufacturers and how they impact on the business case for investment in more sustainable energy infrastructure.

s major consumers of energy, there are considerable benefits in reducing both energy use and costs across manufacturing sites. Energy prices are increasing at a rate of 18-20% and some energy specialists forecast that this may rise to 70% within the next five to seven years. With profits already under pressure, the prospect of energy costs rising at this magnitude cannot be ignored, especially when there are cost models available that show savings can actually pay for investments in energy efficiency. Indeed in the case of methods such as biomass it is possible to generate

12/04/2013 10:47

additional revenue through the Renewable Energy Initiative, thus not only making savings but contributing to profitability. The funding structure is even more effective if using funding methods such as asset finance that spread the cost of the equipment and free up cash flow. In addition to the global increases in energy, new energy and climate change leglisative measures which will take effect from 2020 are expected to add further to the price of non-compliant industrial energy. As we get closer to this date, it will become increasingly important to review the cost of industrial property from an energy perspective. In reputational terms corporate social responsibility is becoming increasingly important. We are seeing incidents where brand reputation rests on delivering a reduced carbon footprint. Companies that can demonstrate they are taking steps in this direction often find themselves at an advantage compared to less proactive competitors.

Paying power The all-important issue is how to finance sustainable energy. The equipment needed to introduce new forms of energy is not cheap but the savings generated are considerable. If you consider that the savings from sustainable energy are growing in direct proportion to the rising costs of traditional energy sources, it is possible to see the pay-back time diminishing so that as you save on energy consumption, you add to your bottom line. In terms of funding, as mentioned earlier, one option to consider is asset finance which is not only very flexible but which enables you to spread your payments and to acquire the equipment straightaway. This means that you can start making savings on your industrial property now rather than sometime in the future. It also help firms keep compliant well in advance of the new legislation, in turn enhancing your corporate social responsibility and your standing with your customers. END

ABOUT LOMBARD... Lombard is the largest asset finance provider in the UK and was voted Best Leasing & Asset Finance Provider by Business Moneyfacts for five consecutive years from 2009 to 2013. Lombard provides various forms of asset finance to businesses of all sizes – from SMEs to large multi-national

corporates. Products range through hire purchase, ﬁnance lease, operating lease and sale and leaseback. Lombard also supports multi-specialist divisions that provide funding for sustainable energy, marine, aviation and technology products. Lombard celebrated its 150th

anniversary in 2011. It is headquartered in Redhill, Surrey but has an extensive network of business centres throughout the UK. For further information please contact: Karyn Theron +44 771 780 7092 karyn.theron@lombard.co.uk

To ﬁnd out more about how you can fund sustainable energy, go to www.lombard.co.uk.

Upwards and Onwards

Julian Hobbs, sales director at Siemens Financial Services explores how to afford technology upgrades in a credit squeeze. any have the idea that British manufacturing went into terminal decline in the 1980s and 1990s, and that its economic contribution is now insignificant compared to other sectors, particularly financial services. This is a myth. As one clear-thinking economic commentator recently noted, in the decade to 2007 private sector productivity grew by just under 3%, with manufacturing contributing 1.1%, business services 0.8% and financial services merely 0.4%. The fact is that British industry is healthy, but has developed a distinct profile compared with the sector in other major European economies. Industry in Britain is now highly specialised, producing products and components to extremely exacting specifications for very high tech applications such as aerospace, automotive, medical, science, defence and so on.

The supply chain for these industries carries a particularly high concentration of precision machining companies in the UK, producing specialist component parts for aircraft, scientific instruments, medical systems and many more applications. This community of component manufacturers relies on precision machine tools and tooling systems, and it is this area of the British industrial landscape that we concentrate on in this article.

Machine tools – supporting British hi-tech One reason for singling out the machine tools industry is that it provides a metaphor for quite a number of other sectors, both in the challenges that machine tools vendors have in maintaining their markets and sales, and in the challenges faced by the precision companies that need to acquire up-todate equipment.

The challenges for machine tool users are, in a nutshell, how to access the latest technology in order to remain competitive and become more efficient. The challenge for vendors is how to help customers afford replacement or new technology when access to credit is tightening. By the machine tools industry, we mean physicochemical units, machining centres, lathes, drills, boring tools, milling tools, grinders, polishers, presses, stone and wood working tools. In the UK, sales of machine tools to precision manufacturers are in the order of £400-£500 million per year. Precision component manufacturers form the varied supply chain that feeds into the making of products such as aircraft, weapons systems or sophisticated medical devices. Members of these supply chains are almost all small to medium-sized companies (SMEs, defined as 50-249 employees). They are highly skilled, niche and often produce on a just-intime basis. They are also precisely the size and sort of company that have fallen victim to a contraction in the availability of credit in the last few years.

Squeezed access to credit Every quarter, the Bank of England produces a Trends in Lending report, which covers movements in the outstanding volumes of loans to businesses and individuals. Since 2009, the stock of lending to British business has fallen steadily in each report. SMEs in particular have seen loan volumes decline without respite. This is a problem for machine tools users – and their suppliers – as the contraction in availability of credit has been accompanied by pressure in the supply chain both on pricing and payment terms. Large engineering firms (buyers of precision components) are keen to pass their own commercial pressures down their supply chain and perhaps one of the most critical financial challenges for SME component suppliers is cash flow. Squeezed margins for these SMEs mean that they have little spare cash

FINANCE 2013 PART II Siemens

Of course, no financier would want to take on a customer who will end up not being able to pay for the solution, so – assuming the lessor has the expertise to understand and validate the business viability of any given machine tool implementation – the financier’s involvement ensures that end-users do not try to acquire a system that does not make sound business sense. In conclusion, the machine tools fleet in the UK’s engineering components manufacturing sector is ageing and in need of replacement if specialist firms are to remain competitive, improve productivity and radically reduce their energy spend.

flow to devote to working capital requirements, of which the greatest is upgrading or augmenting their machine tool systems to improve their competitive capabilities.

Updating the machine tools ‘ﬂeet’ SME machine tool users have therefore tended, in recent times, to sweat their equipment, keeping it for longer in the face of growing capital budget restrictions. The high residual value of specialist machine tools has provided a valuable asset against which they have been able to refinance to raise working capital. However, as the machine tool fleet ages, those residual values have naturally declined, restricting this means of raising working capital. Other pressures have also come into play, particularly the fact that a new generation of machine tool technology is not only offering greater productivity and capabilities, but also hugely improved energy efficiency. With rising electricity prices, not being able to upgrade machine tools systems directly incurs overspending on electricity costs. This is a major financial burden when one considers that – over the lifetime of a machine tool system – power costs are usually many times the original cost of the system. A recent independent study commissioned by Siemens Financial Services showed that British industry could save over £2.5bn over the next five years by switching to equipment that utilises variable speed drives (VSDs) to control the energy use of the industrial motors embedded in those systems. At a conservative estimate, VSDs reduce electricity consumption by at least 25%, in some cases, double that proportion. Machine tools users, and indeed vendors, are therefore exhibiting rising interest in using non-bank loan finance to enable affordability. The latest figures from the Finance and Leasing Association show that plant and machinery acquired through asset finance leapt some 12% year on year.

The role of lease finance Lease financiers, especially those with an industrial background, tend to have a more in-depth understanding of the

The high residual value of specialist machine tools has provided a valuable asset against which SMEs have been able to refinance to raise working capital. However, as the machine tool ﬂeet ages, those residual values have declined. Julian Hobbs, sales director, Siemens Financial Services

business models, applications, benefits and business risk involved with machine tools applications, and are more inclined to craft lease arrangements that fit the end-user’s particular circumstances and cash flow needs. Such tailored leasing arrangements can be flexed by the lessor to make sure that monthly payments are aligned to the benefit being gained from an upgraded machine tool system, whether that is improved productivity, access to new markets, multi-tasking or operating-costsavings from energy efficiency. Further evidence of this trend is the increasing interest from machine tool vendors in embedding finance as part of their proposition. This allows them to have sales conversations where their customers are largely freed from worries over capital budgets and whether they can afford their optimum choice of equipment – if the optimum system for the customer is more expensive, then the finance plan accommodates the requirement through managing the payment schedule.

This is coming to a head at a time when standard bank lending for SMEs has been steadily contracting since 2009. Anecdotal and statistical evidence suggests that machine tools users and machine tools vendors are turning to asset finance arrangements, from lessors who have an increasing appetite for such financing, in order to make these essential equipment replacements without committing capital that is, at best, scarce, and at worst, simply not available. END

asset-light

touch

Maxxia helps companies understand what this trend means for them. Primarily, this means helping them understand the value of their assets. Organisations need to appreciate their position in an asset-light outsourcing chain and think about what benefits their own assets bring to that position. This requires a knowledge of the useful life of assets from a number of business perspectives. Our clients stretch across many sectors, and they are all looking to become more efficient and cost-effective.

Outsourcing is a reality in global manufacturing, expanding the concept of contract production and blurring the lines of asset ownership. Julian Humphreys, chief revenue officer at asset finance and leasing specialist Maxxia has seen outsourcing and asset ownership models change over a 20 year career. He tells TM about the latest developments. Asset-light outsourcing appears to be growing in popularity with businesses today. Is this a new phenomenon and what does it mean to Maxxia and its customers? It seems to be one of the new buzzwords, but it’s not really a new phenomenon. Asset-light outsourcing has been around for many years. Drawing a parallel, I like to compare it to the old ‘dumb’ computer terminals used in offices a number of years ago. There were two types of computer: ‘thin client’, where all of the processing was done elsewhere, and ‘thick client’, where the processing happened in the box under the desk. Asset-light outsourcing is like a return to a type of thin client. In a way, the Web has become the standard business model across sectors. A lot of processing happens away from the ‘desktop’.

What are some specific examples of asset- light outsourcing in manufacturing? Around the asset part of it, it’s about usage rather than ownership. If you turn the clock back a number of years, many businesses wanted to own equipment, but now they are comfortable with usage as a concept instead. The same applies to less tangible capabilities as well

Organisations need to appreciate their position in an asset-light outsourcing chain and think about what benefits their own assets bring to that position. Julian Humphreys, chief revenue officer, Maxxia

FINANCE 2013 PART II Maxxia

as physical equipment. For instance, while General Motors has invested heavily recently in new engine plants, it is also collaborating with Peugeot on chassis development and this is an example of asset-light outsourcing and co-development. There has been a clear shift away from asset-heavy manufacturing business models towards asset-light ones in recent years and this is likely to continue with ongoing off-shoring. A newer trend which builds on established asset-light outsourcing models however, relates to ownership of labelled services and brands. To take an example from the hotel industry; some chain names have sold licenses to rivals, essentially outsourcing their label and reducing their balance sheet commitment to operating and capital costs.

Why do you think asset financing has become an attractive proposition to businesses, particularly manufacturers? Again, it goes back to increasing comfort with the concept of usage as opposed to ownership. This is driven by a realisation of the useful life of equipment – not just from an operational or functionaility perspective – but taking technology turnover, process innovation and sector trends into account. A machine’s useful life from a functionality perspective might be five years, but if a company is at the leading edge of innovation it will likely find that it wants to refresh its equipment even though it is technically still functional and relatively efficient – because industry standards for competitiveness change. Agreeing a lease or funding arrangement for equipment which provides flexibility is therefore very attractive. This is clearly the case in the semiconductor industry. Machines with runners measuring 200mm wide were, until recently, the industry standard in microchip production. But forward thinking businesses experimented and challenged this norm. They discovered that running 300mm wide platforms,

In a way, the Web has become the standard business model across sectors. A lot of processing happens away from the ‘desktop’. Julian Humphreys, chief revenue officer, Maxxia

effectively gives them 50% greater efficiency and this has created a new competitive standard. If a business invested in the 200mm machine for a period of say five years, they are potentially caught at a disadvantage compared to their competition – because their funding method could lock them out of matching asset use with the life expectancy of technologies and processes.

Do manufacturers harbour any negative perceptions of the asset finance industry that Maxxia is aware of? In the past, people often found they encountered hidden costs in alternative finance models and this is obviously frowned on by business. We aim for absolute cost transparency up front. We structure our products around our understanding of the useful life of assets in customer organisations and the benefits a company wants to derive from its assets – both from a technical and strategic point of view. Manufacturers looking for finance solutions for their useful life of a range of assets should ask themselves these questions and ensure they are not faced with potential hidden costs.

Are certain sub sectors of manufacturing showing a particular appetite for asset financing? Microchip manufacturers, as mentioned, are a very strong customer base. Their output level is growing and so is technology turnover – so they need to have a flexible equipment base to keep improving capacity and relevance. The other sector which is seeing some real change is automotive

manufacturing – and associated supplier and downstream industries. Tyre manufacturing for instance is benefitting from the resurgence of the UK automotive sector and if you look at some of the downstream activity to the creation of the tyre, such as polymer manufacturing, there is a clear upturn. Return to health for companies in such areas has brought fresh demand for asset finance. Two key reasons for this are the need to service rising demand after the recession and the need meet new industry expectations around CO2 emissions which have changed significantly. The means that investments must embrace more energy efficient production technologies as well as reducing the environmental impact of products themselves. There are a lot of manufacturers coming out of a flat economy who are looking for a step change in their business performance and how they can go about creating that compelling, competitive advantage.

Are manufacturers generally knowledgeable about the finance options available to support investment plans? Most businesses understand financing, but there is a need to do more education on the increased transparency of asset financing today. We find educating procurement teams and finance teams about the realities is often effective; letting them know that there are transparent agreements available to them, ones where they’ll know exactly what they are entering into and what the terms and conditions are. We find that most of our education work is around defining the up front, affordable costs on offer through asset finance agreements today. END

FINANCE 2013 PART II Review: CBI ‘Ripe for the Picking’

Take your

of finance choices Reviewing the CBI’s report Ripe for the Picking: Alternative Sources of Finance

n May, business organisation the CBI published a guide for alternative finance targeted at UK SMEs in partnership with GE Capital. The report summarises the forces behind an increasing focus on forms of finance other than traditional bank debt. This includes recent bank restructuring and pressure on banks to reassess their risk calculations and strengthen their balance sheets. The process of moving away from traditional forms of finance will be difficult however. The CBI acknowledges that bank debt is still the source of 80% of all credit to businesses in the UK and many companies, SMEs in particular, will lack confidence in moving outside this comfort zone – whatever its faults. The report, Ripe for the Picking: Alternative Sources of Finance urges businesses to familiarise themselves with the rapidly developing landscape for alternative finance in order to realise their potential and achieve growth. In an earlier report, the CBI identified that SMEs will be the “future champions” of the economic recovery. They have the potential to generate an additional £20bn in GVA for the UK economy by 2020 says the CBI – but only if they can find the right finance models to allow them to manage cash flow with confidence and invest in key business development priorities. In the case of manufacturing these include being able to buy technically competitive and energy efficient plant and equipment, but might also mean investing in brand and improving the effectiveness of ‘intangible’ business assets.

Navigating finance choices A company’s choice of finance style will be dependent on its strategy, markets and its need for either growth capital or working capital (see diagram overleaf). But whatever the business need or strategy scenario, what the report makes clear is the wealth of underutilised finance options available to UK businesses – from very niche options which will undoubtedly only relevant to a few, such as crowd funding, to the much better known but still often viewed with suspicion. Asset based lending falls into this latter category. The most common form of asset based lending is invoice financing.

FINANCE 2013 PART II Review: CBI ‘Ripe for the Picking’

ALTERNATIVE FINANCE

YES

DECISION TREE

GROWTH CAPITAL

WORKING CAPITAL

YES NO

YES

NO YES NO YES

While the UK has the highest penetration of invoice financing in the world, the CBI says its potential to facilitate growth is not being optimised thanks to perceptions that it represents a “last resort”. With increased need for finance, and increased transparency in asset based lending products, uptake is building on its strong base however. The Asset Based Financing Association predicts that the sector will grow by 9% in 2013 and it is likely that SME manufacturers will be a target group in achieving this growth since asset based lending is particularly relevant to business to business companies with secured assets like plant and machinery. The CBIs report shows clearly that there has been significant diversification in the alternative finance market thanks to government interventions in conventional banking. The establishment of the Business Bank is an example. This £1bn facility recently deployed £300m to spur the proliferation of bank competition. So called challenger banks and smaller lenders already include Aldermore and Citibank, both of which significantly increased their lending to businesses last year. Business Secretary Vince Cable attended the launch of the CBI report and acknowledged that “manufacturing supply chains have particular difficulties [accessing the right finance], particularly if they are in export markets.” But he indicated he is confident that government initiatives initiated through its Business Finance Partnership, in addition to independent developments in the finance market, will be of assistance. From self issued bonds through equity – public, private and including the Business Growth Fund – the CBI report highlights alternative finance options which can allow business to make the most of their relationships and assets in order to gain the financial support they need without going to a conventional bank. END

The report is a relevant and useful resource for SME leaders and can be downloaded from the CBI website: www.cbi.org.uk.

FINANCE 2013 PART II

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