Bank lending: Hunting for finance in a tight market

Posted on 6 Jul 2010 by The Manufacturer

Banks say they are open for business to manufacturers, but do they really understand the working capital needs of small firms trying to get going after a punitive two years? Borrowing terms can be harsh for companies with orders but no new assets to offer as security. Meanwhile HP options, while expensive, suit some firms as few of them demand personal guarantees. Brian Davis reports.

As the first post-recession green shoots appear, many manufacturers are trying to secure finance for new capital equipment. In a preshow survey for the MACH trade show in June, over 83% of respondents said they planned to invest up to £250,000 in new machine tools. However, depending on the proposition, many firms have hit a brick wall when they approach banks for lending, so have had to find alternative sources of funding for new technology investment.

Despite well-publicised schemes like the Enterprise Finance Guarantee – loans which are supposed to address the needs of SMEs ‘with a workable business proposal but lacking sufficient security to borrow money from approved lenders’ – many companies felt put upon to provide personal guarantees, despite decent order books and a reasonable asset base.

“The high street banks haven’t got a clue about our industry or the machine tool market,” says Jason Nicholson, joint managing director of Unicut Precision. The Welwyn Garden City-based precision engineer employs 30 people and sought to buy three CNC multi-axis lathes recently, costing around £500,000. “We went to the asset lending division of ING, rather than deal with a high street bank.

They didn’t ask for a personal guarantee, but simply scrutinised the residual value of the machine against the deposit we put down.” Much like a mortgage, the bigger the deposit you put down, the better the deal. Unicut put down a 25% deposit and the company boasts a very strong asset base of blue chip equipment. “We have track history, but the criteria for loans are always narrowing,” adds Nicholson. “Two or three years ago we could get approval over the phone, now there’s a lot more diligence.” Indeed, the Federation of Small Businesses’ latest monthly survey showed that a quarter of all respondents are dissatisfied with support offered by their high street bank. What’s more, the level of complaint rises as the number of business managers in charge of the account increases. While 26% of firms reckon they have a good working relationship with their bank manager, 46% complain that their bank managers are not placed locally.

The latest survey tracking credit conditions for manufacturers from manufacturers’ organisation EEF, published in June 2010, doesn’t pull its punches either. “Signs of substantial improvement in credit conditions for business are taking longer than hoped for to emerge,” says EEF chief economist Lee Hopley. “Some companies are still feeling pressure from both the rising cost and falling availability of credit, but the numbers appear to be coming down gradually.”

Hopley maintains: “Though the proportion of companies reporting rising fees and interest rates on existing lines of borrowing is starting to come down slowly, access to new lines of borrowing remains a problem for some companies – with a fifth reporting a decrease in availability.” According to the Access to Credit survey, almost 35% of companies have seen the cost of finance increase, one fifth have seen access to new lines of borrowing decrease, and just under a third have seen the cost of new borrowing increase.

Business looks to HP finance

Many companies are looking to specialist HP companies rather than bank-related borrowing.

“It’s difficult or impossible to increase the amounts you want to borrow from banks, and most are decreasing it,” says Brian Steatham, MD of turned parts manufacturer Rodmatic. Consequently Steatham favours HP deals, “and the more you can put down at the start, the better the deal is.” Over the last 12 months, Rodmatic purchased an Eagle lathe and a CNC vertical mill from Dugard for about £140,000 in total. The three-year HP deal was at a flat rate of 8% APR and there was no need for a personal guarantee.

Graham Dewhurst, director general of the Manufacturing Technologies Association, says: “Over the past two years many banking companies withdrew from leasing. But there are still good niche companies, like CNC Capital and Close Asset Finance, who understand the market and will lend against good assets.” As a rule of thumb, he says it helps to have good up-to-date equipment since a lot of second-hand equipment has come onto the market in the last 18 months, and the residual value has been affected.

Dewhurst considers that the Enterprise Finance Guarantee (EFG) scheme has been a help, but he is concerned that it is only useful for raising finance to support businesses manufacturing goods destined for the domestic market. The EFG scheme is not open to companies whose goods and services are sent for export, as this is deemed non-competitive under EU rules. “This is not the biggest area for many companies in our sector, as a lot of the end-users are exporters,” says Dewhurst. “One of the biggest issues for UK banks is the requirement for performance guarantees. We have also seen a significant reduction in the amount of relationship banking in recent years.” Undoubtedly today’s finance marketplace for SMEs in industry has been favourable for niche players like Close Asset Finance. Their Manufacturing Finance Division operates mainly in the machine tool sector.

Managing director Steve Gee says: “We’ve been open for business throughout the credit crunch, supporting manufacturers who’ve faced lots of problems with banks and invoiced discounting companies. We are not a balance sheet lender but look at the asset value.

We understand the resale value of the second-hand market, and are concerned what a machine will do for a company moving forward.” At a time when many SMEs operating in the manufacturing sector lack cash and/or an adequate credit rating due to the recession, Close Asset Finance has developed a Sale and HP Back product to ensure companies with a viable business can move forward with fresh investment. An existing asset can be used as collateral to enable the company to invest in new equipment. Existing assets can also be used to raise working capital to inject into a business.

Admittedly, Sale and HP Back doesn’t come cheap and interest rates can run up to 20% or more.

“Everything is negotiable,” says Gee. “The rate reflects the risk. However, a very strong company will get a good rate, and sometimes we can be the cheapest in the market.” The model certainly works, as Close Asset lends £7m-£8m a month on average.

“The SME gains new technology and is able to secure a valuable order which may otherwise have not progressed,” he remarks.

If at first you don’t succeed – switch lender

John Cable, managing director of C&M Precision, used the services of James Clist, director of CNC Capital to secure £200,000 of funding for a new Citizen Machinery multi-axis sliding head turning machine. CNC Finance arranged a deal with the Bank of Ireland which required no deposit, just the VAT. “Business is now going mental,” he quips.

CNC Capital deals exclusively with the machine tool market. “For several years lines of credit for working capital have been eroded as banks encouraged customers to take out term loans, and used their own finance houses,” says Clist. “We provide alternative competitive sources of funding which leave existing lines of credit for working capital untouched. We have links with overseas finance houses that have an appetite for the machine tool business, we have provided funding for some very progressive SMEs and OEMs, and our rates compare favourably with high street banks.”

Bespoke automation provider Mechatronic favoured another source to beat the credit squeeze. “We were trying to raise £500,000 for up-front finance to design, build and manufacture automation for International Automotive Component’s Birmingham plant, for use in producing interior mouldings for the new Baby Range Rover,” says managing director Richard Evans.

Despite a compelling case, their original bank couldn’t help, so they switched to NatWest who offered some EFG support. “This was about a third of what we wanted, and 20% was underwritten by personal guarantee in accordance with Government dictate,” Evans adds. Still short, Mechatronic was unable to close the contract. Evans found the solution through David Crampton, a funding broker in the West Midlands. He introduced Evans to Investbx, a company that matches investors to SMEs and administers the Birmingham City Council’s Loan Fund (see below), who was immediately more positive than the banks. Following a rigorous assessment, they offered £250,000 with match-funding of £200,000 from personal funds.

“Negotiations are still underway with Automotive Components, but now we can offer sufficient debt financing,” says Evans. “We sell brain not brawn, investing in people not machinery or premises. Banks tend to just look at the asset base of a business. It’s extremely expensive when you come out of the bank sector as nobody is prepared to underwrite.”

Local authorities lend a hand

Birmingham City Council launched the £10m Business Loan Fund in January 2010 to offer loans to solid and profitable SMEs who were previously unable to access funding. Investbx client relationship manager Andy Povey says: “We will take a higher risk profile but only invest in strong businesses.

There are no specific guarantee requests but each loan will be judged on its own merits.” Regional development agency Advantage West Midlands is also taking applications for Grants for Business Investment. Support is available through the European Regional Development Funds from 10% for medium-sized enterprises in Tier 3 areas, to 35% for small enterprises in a Tier 2 area “subject to standard offer conditions but not personal guarantees,” explains Phil Baron, Grants for Business investment policy manager. The funding is designed to create more jobs or safeguard existing ones, but the bulk of funding must come from private sources.

The final word goes to the banks. Graeme Allinson, head of UK manufacturing at Barclays Corporate insists that “Barclays Corporate is always looking to lend money. Following the worst recession for decades, banks are inevitably scrutinising all lending deals more closely and pricing for risk accordingly. But fundamentally lending, including lending for capital investment, is what we do, so there is absolutely no reason for us to turn down a credit-worthy lending proposition.” In terms of SMEs, Barclays to date has administered more than £165m in EFG loans, and the scheme has now been extended to March 2011. Barclays also recently released £150m in new funding for UK SMEs through the European Investment Bank loan support scheme.

Similarly, Stephen Pegg, a spokesperson for Lloyds TSB Commercial Operations, claims: “About 10% of our lending is for manufacturing, and nearly half our annualised lending growth (of 8%) has been in this area. We are very keen on manufacturing.

Lloyds accounts for 29% of EFG loans, and 20% of EFG has gone to manufacturing and production.

Nevertheless, the loan guarantee scheme is still the minority of our loans. It is aimed at businesses which are viable and meet all a bank’s normal criteria, apart from lacking sufficient security.” He admits the banks are mandated by the Government to apply their ‘normal’ criteria for EFG, which often demands personal guarantees by the owners and/or directors.