Finance for Manufacturers
Need for business growth · Low investment levels · Credit conditions easing · Bank loans too short term · Asset backed finance more popular · Flat appetite for borrowing; corporate finance options · Business Growth Fund · Enterprise Finance Guarantee · National Loan Guarantee Scheme · calls for an Industrial Bank
2012
Report
Finance supplement 2012 ?????????????????????
Show me the money
Finance supplement 2012
Show me the money ’s Credit conditions for manufacturing companies have eased slightly in Q1 2012 versus Q4 2011 (EEF’s Q1 Credit Conditions Survey, Feb 2012)
RBS Manufacturing Fund
Rough guide to finance for manufacturing
Net lending to manufacturing is rising: £289 million* net bank lending to UK manufacturers in Q4 2011
-£1.92bn net lending to UK manufacturers in Q3, 2011
£1bn, launched in 2009, loans of £250,000 to £25 million 3 year rate – 3.95% 5 years – 4.80% Company must be investing for growth Two years interest only, then revert to terms
<40%
(Source: Bank of England)
Commitments to the £1bn RBS Manufacturing Fund
There is demand for our Manufacturing Fund, and general borrowing, but it’s more subdued than hyperactive Peter Russell, Royal Bank of Scotland
Enterprise Finance Guarantee Government-guaranteed lending scheme to help smaller viable businesses by facilitating bank loans between £1,000 and £1m Available to companies with up to £41m turnover
£1.79bn £1
bn
£1
bn
Size of the Govt-backed Enterprise Finance Guarantee Scheme offered to April 2012
*More companies are borrowing than repaying
National Loan Guarantee Scheme Launched in March 2012 The government underwrites loans issued by banks so they’re priced at a discount, typically 1% less than the market rate
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New lenders who joined the RFG in April: Metro Bank Hull Business Development Fund Black Country Reinvestment Society MSIF in Merseyside
In the last two years, we haven’t had any problems borrowing money The banks queue up to lend, but we’ve stuck with one Andrea Rodney, MD of Hone-All Precision, Regional Chair, EEF East of England
Business Growth Fund Equity finance for companies. A private company, it takes an equity stake in a business in exchange for capital. Provides £2m to £10m in growth capital for minority stakes, for companies with £2.5m to £100m turnover.
£2.5bn
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Size of the Business Growth Fund
Manufacturing companies in the UK who have accessed the Business Growth Fund to date
Months since the Business Growth Fund was launched
1 in 4 The ratio of BGF deals in the manufacturing sector that BGF chief executive Stephen Welton wants to see
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Finance supplement 2012 Introduction B usi n ess G rowth F u n d | E n terprise G uara n tee S cheme B a n ki n g le n di n g | C orporate F i n a n ce | Natio n al L oa n G uara n tee S cheme R B S M a n ufacturi n g F u n d | B usi n ess F i n a n ce P art n erships
Dithering at the supermarket doors, or just not hungry?
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The calls for cheaper and longer bank lending terms still ring out across industry, and yet the banks say a healthy manufacturing sector is keeping them busy. With the EFG, BGF, asset and invoice finance and a National Loan Guarantee Scheme, however, no-one can complain about a lack of choice. Will Stirling introduces TM’s 2012 Manufacturing Finance Report with a round-up of some of the finance options available.
et’s assume the demand is out there – the Markit/CIPS Purchasing Managers’ Index in March showed a 10-month high index for manufacturing output. Companies need to invest to grow and money is needed to finance the investment. But the manufacturing sector’s familiar lament has been stifled investment because of an expensive, short-termist market for finance. Is this still true today? The banks say not. Business is brisk, says Mark Lee, head of manufacturing and transport at Barclays. “UK manufacturing feels like an industry in recovery, the conversations we are now having with manufacturers are far more positive than at beginning of the year, particularly in the mid-large corporate space.” Fine if you’re a big company, but what about SMEs? EEF’s quarterly Credit Trends survey in March says: “The increasing cost of new lines of borrowing has eased, with a balance 15% reporting an increase compared with 24% last quarter. However, in line with the trend we have reported over the past few years, the smallest companies are more likely to have seen an increase in cost over the period.”
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Lending to smaller companies is vitally important for the UK. Most manufacturers are SMEs, and they represent the best opportunities for rapid growth – but also the greatest risk for lenders. Barclays’ Mr Lee adds: “We are seeing appetite from both SMEs and large corporates. However, until we see UK domestic demand and exports pick up there will continue to be a divide in the sector.” Confidence then, as well as borrowing terms, is keeping companies away. But are firms which lack confidence looking at all the finance options? Today there is a variety of finance options for companies keen to grow but who may either not qualify for a plain vanilla bank loan, or for whom a different debt/equity mix better fits growth targets. Stephen Welton, chief executive of the Business Growth Fund, which was established in 2011 to provide an alternative means of equity finance for smaller companies (up to £40m turnover), emphasises that the BGF works alongside the banks to find the right debt/equity finance solution for qualifying companies. At the ‘S’ end of small and medium sized companies, the Enterprise Finance Guarantee facilitates additional bank
lending to viable SMEs. Open to businesses with an annual turnover of up to £25m, seeking loans of £1,000 to £1 million, repayable from three months to 10-years. The government provides the lender with a guarantee for which the borrower pays a premium. The Dept for Business Innovation and Skills says that the government has committed to guaranteeing £2 billion of loans over the four years to April 2015.
UK manufacturing feels like an industry in recovery Mark Lee, head of manufacturing and transport at Barclays
Which flavour?
“Across the board, working capital funding and direct bank funding are the preferred types of finance favoured by manufacturers,” says Barclays’ Lee. But some specialist financiers claim that poor bank terms have spurred them to provide new products to suit their own market. Concerned by fears of rising input prices and a double dip recession, managing director of Close Brothers, Steven Gee, was pushing his offering hard at the MACH trade show in April. “Due to the continued lack of lending in the market and increasing cost pressures, there was no growth in manufacturing employment in March, a clear indication of a lack of working capital for businesses to make key investments in their businesses.” Ultimately companies need to want to invest to borrow but strong evidence for that desire is elusive. Oxford Economics with the Manufacturing Technologies Association demonstrates the UK has the lowest investment ratio in the top 11 manufacturing countries since 1998. MTA statistics released at MACH 2012 shows manufacturing investment for capital equipment in 2011 was £11.1bn, down from £11.4bn in 2000 and much lower than its European peers. The philosophical question is whether this low number is due to lousy borrowing terms or a reluctance to invest. Read on to find out more about manufacturing finance options.
SUppoRTIng gRoWTh In MAnUFACTURIng At Lloyds Bank Wholesale Banking & Markets, we know that a strong manufacturing sector is vital to the growth and success of the UK economy. That’s why across the UK, we have local banking and product specialists with experience in the Manufacturing sector, all committed to supporting your growth. Each starts by understanding your business to provide you with banking expertise to help it succeed. In addition, our award-winning economists provide market insight and economic intelligence to help businesses like yours exploit new opportunities at home and abroad. And, with a range of funding solutions to support your ambitions, we’re backing growth in Manufacturing. To find out more, call Carl Williamson on 0845 6803415 or visit www.lloydsbankwholesale.com/manufacturing
FDs’ Excellence Awards in association with the ICAEW and supported by the CBI & Real Business. MS0231-0312
Finance supplement 2012 Lloyds Bank
Finance for organic growth and MBOs
Work your assets Lloyds Bank provides an overview of economic conditions for UK manufacturing and advice on available finance for MBOs and general growth as conditions improve.
Economic overview
The most recent manufacturing sector outlook produced by Lloyds Bank’s Economist Research team suggests that manufacturing may have turned a corner. There is no doubt that manufacturers were shaken by the events of the eurozone crisis in the latter part of 2011, and this has had an impact on exports. UK manufacturing output rose by 2% in 2011, but that was front-loaded in the first half of the year. While the situation in Europe remains a concern, it now seems unlikely the global economy will fall back into recession. Lloyds Bank is now forecasting modest growth in manufacturing output of 0.5% in 2012 and a steeper increase of 2.5% in 2013. Although manufacturers cannot - and do not - expect to ride on a wave of rapid growth across the sector, there are reasons to feel quietly buoyant. The relationship team at Lloyds Bank Wholesale Banking and Markets, supporting manufacturing companies with turnovers over £15 million have seen the mantra ‘cash is king’ widely adopted. Carl Williamson, relationship director, manufacturing sector, comments, that “the move to deleverage following the 2008 banking crisis has resulted in 6
strengthened balance sheets, a build-up of cash reserves and low debt levels.” In other economic environments, such strong balance sheets would support an increase in M&A activity. However, the caution highlighted by Lloyds Bank’s own economic research mirrors sentiment amongst manufacturers themselves. Carl Williamson says that while the eurozone crisis has moved out of the headlines, concern about economies in Southern Europe means that manufacturers are likely to keep their powder dry in the short to medium term. Stuart Apperley, also a relationship director in the manufacturing sector agrees. “With leverage now seen as a dirty word,” he says, “manufacturers are going to struggle to build the equity levels required for successful large acquisitions.” Nonetheless, the eurozone crisis, like many other major economic events, has created certain opportunities to offset the risks. Carl Williamson notes, “With Europe in crisis, manufacturers are starting to look further afield for export opportunities, particularly in China. Exporting to China is a step change but with its rising middle classes China no longer boasts the cheapest labour costs which, combined with stronger balance sheets and fewer opportunities closer to home, contribute to an increased interest in the region. So rather than
large scale activity, it will be the smaller opportunities such as these which will drive M&A activity in the manufacturing sector in the short term.”
Accessing finance for acquisition
While manufacturers continue to deal with the hangover from the financial crisis and slow growth in the developed world, the focus is primarily on making existing assets work harder. According to Martin Cooper, director large & major corporates at Lloyds TSB Commercial Finance, “The current market conditions are actually supporting a return to management buy-outs. Valuations have decreased significantly and, in slightly more austere times, inefficiencies and cost-saving measures are more obvious to identify.” In October 2011, we provided a £35 million receivables finance line to part-fund the management buy-out of Encon Group from its parent company Wolesley. Encon is a leading distributor of insulation and fire protection products, dry lining, suspending ceilings and partitioning to all sectors of the construction industry with a turnover of £194 million. By leveraging the value of Encon’s sales ledger, the asset-based finance facility from Lloyds Bank provided an important source of flexible financial headroom to support future growth. This form of asset-based finance is increasingly being used as part of the M&A and private equity funding mix as it strongly complements other types of debt in deal structures.
Lloyds Bank
Accessing finance for growth
With a big downturn in M&A, how are companies financing growth? There is certainly finance available to companies with the right business case. Lloyds Bank committed £45.3 billion gross lending to UK businesses during 2011, including £12.5 billion to SMEs, higher than the Group’s share of the Government’s Merlin target. However, the changes in the banking sector have resulted in changes to the way businesses deal with banks. It is therefore becoming increasingly important that manufacturers maintain an ongoing dialogue with their lenders, easing the path to liquidity when funds are needed. This return to the old-fashioned ‘relationship banking’ should be welcomed by lenders and companies alike. We have supported numerous manufacturing clients with strong growth propositions. As well as asset-based acquisitions, we are seeing an increase in asset-based lending. A case in point is Esterform Packaging, one of the largest producers of plastic bottles in the UK with a turnover of £65 million. As the food sector increasingly turns to PET plastic bottle to help reduce CO2 emissions, Esterform looked to extend its existing site in Tenbury to meet the increased demand in this product line. Lloyds provided a £6 million asset-based lending facility, leveraged against the firm’s inventory, plant, machinery and property. The additional capacity means that Esterform is well positioned to take its share of the projected three to four percent growth in the PET packaging market.
Supporting the manufacturing sector
As both the UK and global economy recover from financial crisis, manufacturers in the UK are working harder than ever to find growth opportunities. But they are not alone. The health of manufacturing is of political as well as economic importance and the government has pledged to support growth where possible. Lloyds Bank is also keen to continue playing its part by supporting the many strong companies and management teams across this diverse sector.
Lloyds Banking Group initiatives to support manufacturers:
MACH 2012 Lead sponsor for MACH 2012, the UK’s biggest exhibition dedicated to advanced and precision manufacturing technologies. Organised by the Manufacturing Technologies Association (MTA), we have a stand at the heart of the exhibition, giving the bank’s Relationship Managers access to the exhibition’s 25,000 visitors.
Asian Markets Exports Roadshow Events across the UK for sub £15M t/o manufacturing businesses to discuss potential export opportunities in the burgeoning Asian markets. The events, jointly hosted with Standard Chartered, will focus on how companies can help grow trade and enhance investment flows between the UK and key export markets in Asia. Speakers will present a high level overview of the Asian markets as well as an exploration of joint product and partnership capabilities.
Warwick Manufacturing Group Close relationship with the University of Warwick to create an informed, sector-specific training programme for our commercial teams. This development helps Relationship Managers to understand manufacturer’s supply chains and trade cycles, enabling them to offer knowledgeable credit sanctioning and to deploy products and services best suited to the sector. This team of specialist Relationship Managers based across the country are accredited by Warwick Manufacturing Group.
Collaboration with Manufacturing Sector Trade Bodies We collaborate with a number of the manufacturing sector’s leading trade organisations such as the Engineering Employers Federation, UKTI, Manufacturing Technologies Association and Engineering and Machinery Alliance. This strong network has deepened our understanding of the manufacturing environment enabling us to develop banking solutions in response to changing economic conditions
For more information: www.lloydsbankwholesale.com/manufacturing
The buy-out model is also attracting private equity interest. Lloyds Bank has been involved in a number of deals where the equity is provided by private equity and the debt by the Bank. For example, in October 2011, it supported Bridgepoint Capital in its $84 million acquisition of Hampson Industries’ Aerospace Components & Structures, which is now known as Shimtech Industries. Shimtech is the global leader in the manufacturing and supply of shim solutions to the commercial and military aerospace markets. The company is now focused on expanding and developing its product range to meet the needs of the next generation of aircraft, as well as identifying opportunities to provide greater geographic flexibility to its global customer base.
Finance supplement 2012
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Finance supplement 2012 Corporate Finance - Siemens Financial Services
Energised finance: Siemens and the Carbon Trust have provided £550m for energy efficient projects for UK businesses.
By manufacturers for manufacturers Siemens Financial Services explains why its vested interest in a strong industrial base in the UK has led to the development of offerings which promise more than money can buy.
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iemens is a big name in UK manufacturing. It employs around 13,000 in the UK including approximately 5,000 directly in manufacturing. Its sectoral reach is broad, with vertical specialisms in industry, energy, healthcare and infrastructure & cities. It was voted the UK’s number one Industrial Engineering Brand for the third year in a row in 2012. Given its position it is not hard to extrapolate that Siemens makes a hefty contribution to UK GDP and has a vested interested in the health and capability of the extensive UK supply base which supports its multi billion pound revenues year on year. Perhaps less widely acknowledged however, is the role that Siemens plays in developing this supply chain, and indeed the overall manufacturing community in the UK, through its financial services business. The Commercial Finance division of Siemens Financial Services (SFS) in the UK
employs circa 230 people across three UK sites. SFS worldwide employs around 2,600 people and, as of September 2011, had total assets amounting to Eu14.6 billion. SFS provides flexible finance to a wide range of businesses including energy companies, manufacturers and energy to waste organisations. Finance types are also broad, covering debt financing and equity through to leveraged finance, working capital finance, asset finance and leasing arrangements and more. Statistics on customer base and lending levels infer that these facilities are well leveraged in the UK, with SFS having over 70,000 commercial finance customers in the country. However, with access to finance remaining a major concern and barrier to some customers’ growth, SFS is keen to raise its profile. There is a feeling that its own good news stories only account for the tip of the UK’s manufacturing iceberg and that the mistrust which now dirties the water of many companies’ banking relationships, is obscuring opportunities to use alternative finance routes, such as Siemens. Simon Corbett, head of sales for SFS in the UK Commercial Finance division comments on this challenge: “We write a lot of business and if you are involved in the wind sector in the UK you will probably be aware of our financing activities because they have been widely publicised in that area. For general manufacturing though we need to get the message out there about the breadth of financing we offer for investments in emerging and established technologies. It’s everything from plant equipment, energy efficiency projects, building automation, IT and even photocopiers.” And contrary to the assumptions of many, it is not necessary for any or all of the financed investment to be in Siemens’ own products. Moving on to address the more problematic business barriers of confidence, Corbett sympathises with widespread disenchantment with traditional credit lines which have become squeezed, more expensive and sometimes simply withdrawn. And of course continued instability in global markets has quashed the ambitions of many firms who would like to invest, but are nervous of reducing their access to cash. Although many surveys
Corporate Finance - Siemens Financial Services
and reports, including Siemens own Business Confidence Investment Index, show that 2011 has seen a pickup in industrial confidence in the UK, they also highlight that increasing confidence is yet to be backed with increasing capital expenditure (see graph). This could represent a big problem for the UK. Failing to upgrade plant infrastructure and IT endangers ambitions to re-establish the importance of manufacturing to national wealth and the ability to maintain a position as a technologically advanced manufacturing nation. Corbett believes it is time for a more compelling finance offer for manufacturers. And he is confident that
If you are involved in the wind sector in the UK you will probably be aware of our financing activities Simon Corbett, head of sales for Siemens Financial Services
Win-win: Green finance
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ne of the biggest drivers Siemens Financial Services observes for investment in manufacturing firms is the need to achieve energy saving. To support this SFS has teamed up with the Carbon Trust to provide £550 million over three years to facilitate energy efficient projects for businesses in the UK.
Under the Energy Efficiency Financing Scheme, the Carbon Trust and Siemens provide finance for businesses looking to invest in energy efficient and low carbon technologies. The finance scheme, which remains unique in the UK, has been available to businesses since April last year and works on a concept of ‘zero-net-cost’ to companies for investment programmes from as little as £1000 up to many millions. Finance payments are usually made at a rate equal to or less than the amount predicted in energy cost reduction so it is possible that a company will achieve a net positive cash flow
almost immediately through using the scheme to back investment. The scheme provides finance for all sizes of projects of which the majority prove to be either cash positive or cash neutral. However, consideration will also be given to investment where beneficial energy efficiencies can be made, such as those often made in manufacturing plants, where energy savings may not be able to achieve net positive cash flow but they will still provide a large subsidy for an investment which is also likely to bring productivity gains through upgrading outdated legacy equipment. Case studies of UK businesses which have benefitted from the Energy Efficiency financing scheme in the last year are available at www. energyefficiencyfinancing .co. uk. These case studies cover companies across sectors from UPVC manufacturer Kensington Trade Fabrications to hotel, golf and country club Nailcote Hall.
Finance supplement 2012
SFS’s unique empathy with manufacturing challenges has allowed it to create just that. “We have moved to a concept where we don’t talk about borrowing so much as usage,” says Corbett. The focus is on using expertise from Siemens’ own manufacturing pillars to help companies find the best investment solutions, implement them and record ROI, he explains. Picking up further on the ‘by manufacturers for manufacturers’ nature of this offering, Corbett talks of dealing with classic dilemmas over the need to make energy savings while increasing capacity within the limitations of a given plant footprint – not in theory, but thanks to the experience of setting up a finance solution for Siemens’ own Congleton plant in Cheshire. This case study proves that Siemens is not afraid to take its own medicine. Robin Philips, finance director for Siemens Industry Group confirms this, saying: “The challenges our customers face, we face too. This comes through in the arrangement we made at Congleton. This is far more than a finance agreement. It is a leasing arrangement that gives Congleton the ability to upgrade and refresh the equipment as changes in technology come along. At the same time we released existing capital to be spent elsewhere in the business.”
UK – Capex versus Business Investment Confidence
Corbett adds: “It’s a combination of green finance and productivity finance which allows companies to upgrade to equipment which is more efficient and meets rising environmental expectations and compliance demands.” When taken to Siemens’ customers this approach has the added bonus of helping Siemens achieve internal targets to reduce total customer CO2 emissions by 300 million tonnes by 2014. Siemens has invested millions in its own manufacturing capabilities in the UK, a market where it sees long term opportunity. Its interest in supporting a well equipped, competitive manufacturing environment in Britain is far from impartial and is supported by an ambitious UK vision statement. “SFS is playing an important part in a companywide campaign to make sure British manufacturing become truly great again,” sums up Philips. 9
Finance supplement 2012 Siemens
C ase
S tudy
Siemens’ Congleton site acquired new equipment using Siemens Financial Services, but any corporate borrower can be a customer
match outgoings with those savings and benefits. Ideally, financing should also wrap up all elements of the total cost of ownership of that technology – acquisition, maintenance, service, even possibly future upgrades or retrofits.
Applying the concept
Financing competitiveness A case study of Siemens Financial Services’ support for investment at the company’s own Congleton manufacturing facility.
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iemens Congleton is a UK-based high tech manufacturer of specialised electronic drives. To maintain its competitive edge, Siemens Congleton has invested consistently in three key areas. First, the plant has applied lean principles across both manufacturing and administrative operations to dramatically improve productivity and quality. Secondly, recognising that more was needed to move to the next level of operational efficiency and economic competitiveness, a number of strategies have been developed to achieve focus on improving time to market for new product introductions. The goal is refered to as ‘super-fast time to market’. 10
Thirdly, there has been a focus on financial efficiency, with a particular emphasis on capex-opex balance when acquiring the latest technology for the site’s production lines. The spotlight on financial efficiency is the main subject of this brief summary.
Use your imagination
For manufacturing operations in the developed world, efficiency and automation have to be pursued relentlessly in order to remain competitive. One increasingly recognised priority is to avoid tying up scarce capital in technology investments, instead finding more imaginative ways of financing those investments so as to align them with the benefits they bring. Those benefits tend, principally, to be higher productivity, substantially greater energy efficiency, and higher levels of automation. However, these benefits do not all accrue on day one, but are reaped month by month. The most appropriate way of financing such investments should therefore
At Siemens Congleton, a need was identified to invest in new surface mount equipment, which automatically affixes electronic components on a printed circuit board – effectively one of the most important processes at the Siemens electronic drives manufacturing plant. In order to avoid the use of precious capital, Siemens Congleton came to a commercial arrangement with Siemens Financial Services. SFS is an active financier in many markets, with a significant amount of its income in the UK derived from financing industrial technologies. A fully inclusive leasing arrangement was established, over a five year term, to acquire, maintain and service the new surface mount equipment. This meant that monthly lease payments for the new equipment were effectively subsidised through productivity, automation and energy efficiency gains, all of which also accrue monthly. This arrangement provided the optimum cash-flow solution to acquire the new equipment.
The benefits
The lease payments for the new equipment amounted to a monthly charge of just over £11,000, over five years. The equivalent monthly cost of borrowing the acquisition capital and writing it down over five years would have amounted to a charge of over £16,000/month. The new equipment is 55% more efficient on its electricity consumption than the technology it replaced. This saves around £10,000 per year. The new equipment can pick and place 42% more components on a single PCB, when compared to its predecessor. This allows us Siemens Congleton to design and build more efficient and powerful inverters. Finally, First Past Yield has increased by 0.5%, and as a result rework costs have dropped by 66% saving £12,000 per annum.
Finance for industry Green business finance solutions tailored to your needs www.siemens.co.uk/financialservices
In 2010 Siemens saved its customers 270 million tonnes of CO2 emissions. Provision of the latest expertise in Siemens technology together with innovative financing solutions have helped industrial manufacturers put in place energy saving technologies which drive the bottom line, reduce emissions and enhance shareholder value without any upfront capital investment. As a reputable manufacturer, Siemens not only has in-depth process and manufacturing knowledge, but access to the largest portfolio of sustainable technology solutions in the world.
And as a trusted provider of financial services, arranging finance for 90 of the current FTSE 100 companies and more, Siemens is ideally positioned to offer businesses tailored financing and energyefficient solutions which are crucial to underpinning the determinants of a companyâ&#x20AC;&#x2122;s success from unstable energy prices and increased costs to energy efficiency and carbon reduction targets. For further information email: info.sfs@siemens.com for financing or info.industry.gb@siemens.com for industry Tel: 01753 434264.
Financial Services
Weak investment exposes need for finance for rebalancing Finance is possibly still the single biggest barrier to growth. EEF’s senior economist Andrew Johnson explains the banking industry’s and government’s recent actions to improve the availability of credit.
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ne of the government’s key economic priorities is to ‘rebalance the economy’, and one approach to this is aimed at shifting the economy to a greater reliance on business investment and net trade. However, this form of rebalancing remains a formidable challenge. While there has been strong growth in UK exports (2011 exports up 23% from 2009), business investment remains very weak. The Office for Budget
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EEF
Finance supplement 2012
Responsibility’s forecasts released with the Budget in March show a downgrade for business investment in 2012 from growth of 7.7% expected in November to just 0.7% growth expected now. This unfortunately follows a similar downgrade to the 2011 figures last year.
Taskforce, for example funding the £2.5 billion Business Growth Fund.
Access to finance is a key part of the weakness in business investment.
Investment intentions have been strong during the recovery but, as the OBR’s forecasts reflect, actual investment continues to lag
EEF’s latest Credit Conditions Survey, released in March, again confirmed the trend we have seen since the financial crisis that availability of finance remains patchy and the cost of finance is worsening, particularly for small firms. This matters because although investment intentions have been strong during the recovery, as the OBR’s updated forecasts reflect, actual investment continues to lag. Undoubtedly the massive uncertainty stemming from manufacturers’ key markets in Europe is a factor behind this.
Such a [securitising] institution would buy bundles of SME loans off banks thus freeing them up to lend more to businesses But the supply-side is playing a role too – and crucially the supply of finance is much more within the power of policymakers and finance providers to influence.
Growth funds and finance partnerships
Progress is needed. We need to see an improvement in the availability of finance on reasonable terms – this is both within the banking system and from alternative finance providers. Banks have made gains improving access to finance through the Business Finance
Government has taken steps too by creating the £1 billion Business Finance Partnership to co-invest with alternative debt providers.
Business Finance Taskforce Five high street bank consortium established in 2010 tasked with making bank borrowing easier.
Business Growth Fund
£2.5 billion fund to invest in equity stakes of qualifying businesses who can demonstrate growth potential
Business Finance Partnerships
Government funded £1 billion fund to co-invest in companies with alternative, non-bank debt providers
National Loan Guarantee Scheme
Government scheme meant to reduce the headline rate on loans to small businesses
But there remain gaps, particularly for SMEs looking for patient capital to help finance expansion to meet much larger orders coming down the supply chain. There is merit in investigating the feasibility of creating a securitising institution for SME loans in the UK. Such an institution would buy bundles of SME loans off banks thus freeing them up to lend more to businesses. Separate from availability, the cost of credit needs to come down. Until recently neither the banks nor the government confronted this as an issue holding down access to finance. In November the government relented to overwhelming pressure to do something about the cost of bank finance and introduced the National Loan Guarantee Scheme, which is meant to reduce the headline rate on loans to small business. The proof will very much be in the delivery, however, with previous schemes suffering from a lack of awareness in the branches of high street banks in the regions. Improving finance remains very much an active debate that is crucial to the rebalancing of the UK economy. 13
Finance supplement 2012 Invoice Financing
Join the funding revolution Recent remarks in the heat of the ongoing eurozone crisis that the UK has let its manufacturing base wither on the vine at the expense of financial services are exaggerated and need to be viewed in the context of a political defence for the City. 14
The findings would appear to support a survey held by the CBI in March 2012 where UK manufacturers reported a strengthening demand and expected output to grow. Of the 436 manufacturers responding to the CBIâ&#x20AC;&#x2122;s latest monthly Industrial Trends Survey, 39% believe that output would rise in the next three months, while 15% expected that it would fall. The resulting balance of +24% is the strongest since March 2011 (+27%). Yet this view from the tree-tops doesnâ&#x20AC;&#x2122;t quite alleviate the challenges facing grassroots manufacturers who are more concerned about the state of their order books and paying the wages at the end of the week. Inflation means a more costly operation; the crisis in the eurozone hits the order books, rising fuel costs hit the bottom line straight away and the funding gap just seems to get wider with companies continuing to report about the inflexibility of their banks. Indeed the findings of the most recent Close Business Barometer (a quarterly independent survey of businesses across the UK) found that 38 per cent of owners of SMEs in the country had been turned down for finance this year with another 39 per cent not approaching their banks for fear of being rejected. Thankfully there are other solutions. Asset and invoice finance are now mainstream funding options in the UK. Recent
Thirty eight per cent of owners of SMEs in the country had been turned down for finance this year with another 39 per cent not approaching their banks for fear of being rejected
Close Business Barometer, a quarterly survey
Finance supplement 2012
statistics from the UK Asset Based Finance Association (ABFA) show them outperforming all other types of business lending. The rise in popularity of these funding methods over the last decade has been driven by gradual recognition of the security and flexibility they provide when compared with other funding choices.
What is asset finance?
Asset finance encompasses hire purchase, leasing and refinancing. Packages can be tailored to boost cash flow and purchase or upgrade vehicles, plant or machinery as required. Instead of businesses using their own funds, which could see them being starved of vital working capital, asset finance allows companies to purchase an asset on a low capital outlay with repayments matching the income stream generated by those assets.
What is invoice finance?
Invoice finance allows a business to raise cash against the value of unpaid invoices that they have issued. The invoice finance provider will pay a proportion of the invoice, up to 95 per cent (often within 24 hours). When the customer has paid, they will then pay the client the remainder of the invoiceâ&#x20AC;&#x2122;s face value, less any administrative charge.
To find out more about how Close Brothers can help your business please call 0808 231 7707 or visit www.closebrothersmanufacturing.co.uk
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n fact, the good news started for manufacturers back in December 2011 when manufacturing output rose by five times more than expected, up by 1 per cent on the month according to the Office of National Statistics. This small step forward continued in January 2012 and data from February and March seems to confirm a cautious upward trend.
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Close Brothers
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Finance 2012
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