Jane Gray investigates a new finance product designed to support the import of capital equipment and ease the pain of international purchasing for British manufacturers.
The last couple of months have seen mounting comment and commentary on ‘alternative finance’ options for UK businesses. This is to be a central theme at EEF’s national conference (see p42) and was pin-pointed by Business Secretary, Vince Cable, in December 2011 with the launch of a new industry-led taskforce to prompt the diversification of business finance.
The motives behind this movement are manifold but include an assertion that diverse financial backing can give companies greater confidence and also reduce the burden on banks to shoulder the responsibility of increasing access to finance to UK firms. Tim Breedon, Legal and General CEO and current chairman of the Association of British Insurers commented at the launch of this taskforce that “Non-bank finance is likely to make an increasingly important contribution, so we need to develop alternatives that work for firms.”
It is this customer focus and emphasis on providing products that really answer current business needs which is behind a product launched by Lombard and sister-organisation, Global Transaction Services (GTS) at Royal Bank of Scotland, in June last year. The product is called Capital Import Finance (CIF) and, at a time when the manufacturing sector is being looked to for economic recovery, export growth and the establishment of a national pedigree in niche or specialist manufacturing capability, it may provide a powerful finance solution for manufacturing companies.
What and why?
CIF provides a combination of trade and asset finance along with other support services in order to put UK manufacturers in touch with the assets they need to differentiate and remain internationally competitive – both in terms of the products they are turning out and the processes they employ.
Lombard MD, Alex Baldock explains: “This product answers a very important need. If the UK is going to prosper then we need to export. Manufacturing will have to lead in taking on that burden and it will need to be competitive. This means it needs the best kit and a large proportion of the best manufacturing kit – especially for niche products, processes and markets – now comes from overseas.”
Getting hold of that crucial capital equipment however, is easier said than done. In the first instance, manufacturers need to be confident that they are up to speed with what represents cutting edge technology, where to source the best equipment from and be capable of negotiating a value-for-money deal.
Traditionally, once a manufacturer had done all this they would also need to find a trade financier to support the deal up to commissioning and then an asset financier – or some other source of funding such as working capital, term debt or cash – to repay the trade finance and fund the asset through life.
“In 2010 British businesses invested less in CapEx than Mexico and Turkey – two fast growing manufacturing powers” – Alex Baldock, MD, Lombard
For any company – and particularly SMEs – this represents an administrative nightmare involving high levels of risk and potential cash flow problems. According to Mr Baldock the complexity of buying equipment abroad – or indeed of investing in plant at all – has had a negative impact on UK competitiveness and caused British industry to “rust.” Pressing this point home Baldock asserts “In 2010 British businesses invested less in CapEx than Mexico and Turkey – two fast growing manufacturing powers.”
CIF aims to narrow this investment gap and remove the off-putting complexity which discourages manufacturers from being more adventurous in their investment plans.
“What we have been able to do with Capital Import Finance is simply create a one stop shop that funds the kit from the moment you order it right the way through to the end of its working life,” says Baldock. “This product works because while we are the UK’s number one asset financier by some distance, we also sit alongside the UK’s number one trade financier in the RBS GTS group. We have pulled together our experience in a relatively simple and user friendly form which I believe will be very powerful.”
Another spokesperson from Lombard wryly admitted that it is disappointingly still unnatural for such a large banking organisation to be working in the coordinated fashion demonstrated in CIF.
A qualifying customer for CIF will benefit from the extensive combined knowledge of Lombard and RBS GTS. “Between us we know a lot about global kit manufacturers and can help customers find the right supplier,” explains Baldock, also asserting that the bargaining skills shared by the two financial institutions will usually enable manufacturers to get a much better deal on their purchase.
“With Capital Import Finance you don’t have to juggle the varying interests of the supplier, the trade financier and the asset financier, it also means you will get much better terms overall” – Alex Baldock, MD, Lombard
Beyond reducing the administrative burden of sourcing and importing capital equipment CIF is also attractive in terms of minimising the risk involved in an international purchase. “We can help reduce the drain on cash flow involved in putting down the deposit for the kit and we can also help with the risk of putting down a deposit with a company which you might not know,” explains Baldock. This means that GTS take responsibility for ensuring the kit is delivered on time and to the specification expressed by the manufacturer.
Rounding off the CIF package the provision of asset finance by Lombard provides an integrated means of paying back the GTS trade finance and of supporting purchased assets throughout their useful working life. “With Capital Import Finance you don’t have to juggle the varying interests of the supplier, the trade financier and the asset financier, it also means you will get much better terms overall,” says Baldock. As a committed facility CIF also allows companies to budget with certainty and therefore supports business confidence in the longer term.
Who is eligible for CIF?
- CIF is only available to current RBS and Natwest clients (or those prepared to switch banks in order to benfit)
- CIF is not applicable to deals under £175,000
- In order to qualify for CIF companies must pass standard credit approval tests and deals must not compromise the ethical of political standards of the RBS group (Import deals from countries such as Iran, for example, would not be supported)
- CIF is available to manufacturers in all sectors CIF is applicable to all plant and machinery investments including extruders, palletisers, machine tools, bespoke manufacturing lines and more
Although CIF is a relatively new product – it does already have success stories to tell. International Automotive Components, a supplier of automotive components and systems, utilised the finance to purchase five new injection moulding machines from Germany – a business critical purchase which enabled it deliver a lucrative contract supplying Land Rover and Range Rover Sport components.
Derbyshire-based AIM Engineering is also an exponent of CIF having utilised the scheme to acquire a five-axis milling machine. This purchase increased capacity for the company’s production of jigs and fixtures for the motor and aerospace industry, an expansion which would have been difficult to achieve without CIF since AIM would have struggled to pay the 25% up-front deposit for the £830,000 investment.
With advice and assistance from GTS and Lombard however, AIM were able to use a deferred letter of credit to stage payments at 10% up front, 10% on completion and the remainder to be met through a lease purchase agreement.
Keith Softly, head of strategy and product development at Lombard stressed to TM that “CIF will not have a resonance with every customer” and that it is early days yet for demonstrating its benefits. But having stated this cautious stance, Mr Softly also expressed a belief that this product will prove itself a powerful tool as British industry moves to take a lead in advanced manufacturing requiring specialist equipment.