From the bank’s perspective
Mark Lee, managing director and head of manufacturing at Barclays, talks through three steps manufacturers should take to maximise the chances of securing bank finance:
- Engage with lenders early and be as open as possible about business strategy and rationale for specific activities under consideration.Whether the business needs funds to address financial problems or to exploit investment opportunities, it is vital to give lenders time to make informed decisions in a transparent, open dialogue;
- Manufacturers will ideally look to provide quality, detailed information to enable lenders to assess funding requests. This should include an understanding of historic, current and forecast trading performance. Profit and loss and balance sheets are important but banks are most interested in a company’s cashflow. Detailed cashflow forecasts under base and stress case scenarios, complete with strategies for responding to various risks, are essential;
- Help your banker fully understand the operating environment and your business objectives, including wider industry trends. This will ensure common thinking. Make sure you sustain this with regular contact and prompt delivery of information when it is required.
While it is very much à la mode to vilify the banks for not giving sufficient support to SMEs or failing to understand sector needs, the current economic climate provides a good motivation for businesses to reassess whether they are approaching their banking relationship in the right manner and with the right understanding of what facilities are on offer in relation to their needs.
According to Jonathan Duck, managing director of flooring manufacturer Amtico, businesses can put themselves in a difficult position by failing to scope their financing needs accurately or by being over ambitious in explaining the dividends they believe finance would bring. “Do not over promise and under deliver,” says Mr Duck. “There is no point in describing some overblown plan that will only come back to haunt you.”
The key to getting the pitch right, according to Alastair Hardie, partner at Eversheds LLP, is simply to ask your bank exactly what information and level of detail they will expect in advance. “That way you can select the best people in the business to take to the meeting to represent your case,” he comments.
Largely the right people will be the CEO or financial director, but Mr Hardie emphasises that representation of quality senior management and control of costs across the board will bring a position of strength. He also says that in some special cases, with emerging technologies that have high competitive potential, it can be beneficial to bring in technical and market knowledge from the wider team. “You’ll find that some relationship directors with a sector specialism will be very interested to know about the technical aspects of the business as well as the financials – though these are the priority.”
If your request for finance should be declined in one quarter, Hardie urges businesses not be too downcast. “Banks have a spread of business. If you get turned down it may simply be because the bank has already lent too much to your sector – not because your own relationship director doesn’t feel you have a good case.”
Ask for help
Jonathan Duck is keen to highlight that manufacturers need not feel isolated when looking to get finance. “Get a debt advisor,” he says. “Particularly if you are raising large scale debt.”
“Not many manufacturers seem aware of the services a debt advisor can offer,” says Duck. “But they can be extremely helpful.” Duck explains that a debt advisor will run an auction for a business which gives a range of banks the opportunity to offer their best finance package for your business. “They will also tell you what to do with your forecasts to make sure you do not get carried away and are requesting the right amount of debt,” he comments.
What’s the problem?
There is a lot of noise about business dissatisfaction with banking services. But what exactly is it that business leaders are finding troublesome? A recent survey by the accountancy association MHA revealed the following from respondents
- 42% of respondents believed that they were not receiving adequate support from their banks;
- Only 20% of these indicated that they had recently changed or intended to change their bank.
The respondents flagged their main issues with their banks as being:
- Access to funds 70%
- Lack of communication about changes in service 41%
- Unexpected increases in costs 35%
- Changes in terms of loan securities 28%
Chris Coopey, partner at Carpenter Box and head of manufacturing group at the association of consultancies MHA, agrees that manufacturers shouldn’t feel like they have to make all banking decisions based on internal expertise. “If they are worth their salt, your accountant should be able to help you to manage your relationship with the bank and can also help if you are considering changing your bank,” he says.
What’s the catch
Having good quality advice can avoid falling foul of catches in finance agreements, continues Duck. “In my experience you need to look out for accelerating covenants, especially in relation to highly leveraged lending,” he says. With this scenario companies can find that if their business plan accelerates, so the required covenants for the bank, in relation to profit and cashflow, accelerate. “So as your performance improves your requirement to improve increases. It’s counterintuitive,” Duck sums up.
Provided manufacturers seek sound advice and bring the right skills in-house – Mark Ager (see box) says a good finance director is worth £500,000 in liquidity if they leverage your banking relationship effectively.
Manufacturers are theoretically well placed for finance at the moment, concludes Evershed’s Hardie.
“The top level messages from all the banks clearly put lending to manufacturers high on the agenda,” conclude’s Evershed’s Hardie. “If your experience does not reflect this, challenge your relationship manager on it. If you are not satisfied with their response take your business elsewhere.”
Finance for the times
Government and trade bodies are pushing hard at the moment, to encourage UK manufacturers to export more and to tap into lucrative rapid growth markets like the Middles East (p47), the BRICS (p44) and certain regions of Africa.
But for those manufacturers looking to do this is the support right when it comes to finance? Not often, according to Mark Ager, managing director of Stage Technologies, an SME manufacturer of stage automation products.
“We are a highly international business,” comments Mr Ager. “Depending on the year, we might do 80% of our business abroad, often with national governments. It is therefore crucial that our debt and liquidity is recognised across international boundaries.”
But while this may seem a reasonable expectation in a globalised world, Ager says it was hard to find a bank that could (and would) do it. “Originally we were with NatWest, but they only understood debt in the UK. So we changed to Fortis about eight years ago. Fortis had a good understanding of European debt and that was where most of our business was at the time.”
Then Fortis fell apart in the recession and in January 2009 informed Stage Technolgies that they would no longer bank for them.
But that’s another story, says Ager. Dusting itself off from this turn of events, Stage Technologies went back to the banking market to look for a new partner which would support an increasingly diverse international mix of business. “We went to most big names but eventually settled with HSBC, primarily because of its international links. Obviously these include good links in Asia, but we were really sold on the fact that they could overcome a problem no one else seemed to be able to handle – America.”
Ager says that, bizarre though it may seem, the USA is a relatively challenging market to manage in terms of finance. “American banks tend to have a ring around them. Cash held there is not recognised this side of the pond and it can be a struggle to get banks to take an integrated view of your liquidity,” explains Ager. While he says HSBC’s processes can be convoluted, they do the job.
For more insight into manufacturing finance options see TM’s outbound report Finance for Manufacturers circulated with this issue.