Want to know what the banks want when applying for credit for significant automation systems? Hopefully TM’s five key points can help you out.
According to Gambica, the UK’s trade association for the instrumentation, control and automation industry, while the economy has been relatively flat in recent years, the automation market has been growing year on year.
In TM’s latest Automation report released this month, Steve Brambley, deputy director at Gambica, says that caution and cutbacks have almost become the norm among industry, however those who are brave enough to see the future benefits to their businesses are investing their money in technology and equipment to boost the competitive position of UK industry and drive future growth.
It’s fair to say the potential benefits of introducing automation to factories has already been widely publicised – one only has to look at nations such as Germany to see how productive its Mittelstand is largely due to its acceptance of automation – however the purchasing of robotics is not always as straight forward as manufacturers would hope.
In order to try and help cut through some of the red tape when dealing with banks or financial institutions, TM’s Automation Advisory Board recently met with key industry heads from eight of the large banks to try and determine a few key factors SME manufacturers should consider when approaching banks to apply for credit for the purchase of significant automation systems.
The idea was to have all banks come to consensus on the points. As Kevin Rimmer, head of manufacturing at Clydesdale Bank said: “We expect that automation in the manufacturing sector will gain increasing focus as processes become more global and
competitive. Automation is here to stay and we believe that it is in everyone’s interest to work closely to understand the opportunities of ongoing investment in this arena.
“The benefits of forming a close working relationship with financial institutions are clear, especially when considering significant asset investment such as automation. It enables early dialogue and a clear understanding of a company’s strategy and the benefits of the investment.”
TM’s Automation Advisory Board meets the banks
A consensus of five key points for consideration when manufacturers apply for credit for the purchase of significant automation systems.
1. Overview of company structure, management team and key responsibilities, their experience (especially in implementation of automation systems) and any succession plans.
Be clear, concise, and make things simple. You want any potential lender to be able to understand your business as quickly and simply as possible. Sharp communication is almost always demonstrated in the way the business operates. The bank is looking for the key people who will be fully engaged and committed to delivering, both in the past and in the future.
2. For the investment itself, a business plan, including all financial plans (historic balance sheet, profit and loss and ideally forecast balance sheet, profit and loss and cash flow statements) and assumptions, such as expected productivity and efficiency gains, cost savings, etc.
Putting in the effort to produce a solid business plan is a crucial step in securing funding. The business needs to demonstrate that it can generate sufficient cash to repay the requested facility and the more in depth and robust your plan is, the more it will help potential lenders understand your desired outcome for your business. The actual act of putting together the business plan will also help management to better understand its own strategy, identifying where potential risks may lie and what could be the potential impact if the plan is not strictly adhered to. Whilst the primary source of repayment for the bank facility will be the profit/cash generated through business activity, the bank may also require security to be given in support of the facility. Your plan should include some realistic sensitivity analysis. It is more likely that things will not go to plan than go to plan.
3. Full sets of the latest audited financial and management accounts along with appropriate commentary. How is the business performing, gaps to plan, reasons for over, or under performance.
Make sure your records are up to date and be in a position to articulate trends in sales volumes, margins, overheads, etc. Again, communication is key to developing a solid relationship from the beginning. This creates confidence within the partnership and eases the route to further support.
4. An understanding of the businesses’ wider banking facilities e.g. overdraft, invoice finance, trade facilities. Also for creditors/debtors, additional commentary on any dependencies would be welcome and an understanding of payment terms for the largest in each category.
It’s a fine balance when presenting your suitability for funding and what risks your business has to manage. An internal view of the business capability should be presented together with a perspective on the key external factors. Be honest and be prepared to justify any dependencies and current loan or finance payments. Also be willing to consider a range of financing options, including equity, to help fund the growth of the business without exposing it to the downside risks of taking on too much debt.
5. For the investment itself, what’s the rationale for the purchase? Why has the business chosen the particular make, model and how much will it cost? What’s the total cost of ownership and how long will it take to implement?
The pricing should always be a full negotiation with both parties achieving agreed terms for the business. Be specific about the purpose and rationale for amount and how any loan can be repaid over the businesses’ preferred term. The basic act of having your house in order and a clear, concise justification of your desired purchase will only strengthen your negotiating hand and once again, help to establish a clear line of communication between both parties. It will also be beneficial to agree a clear agenda with the bank beforehand about what you are trying to achieve at a meeting. Ensure that all key sites can be visited and key people are available for discussion.
Neil Lloyd of Lombard talks about the relationship between banks and manufacturers looking to obtain finance for automation equipment.
What are the most common mistakes or shortfallings manufacturers make when applying for credit from banks for automation kit?
We tend to find that when applying for credit many manufacturers omit information on the impact that the automation investment will make to their business.
Any funding application is strengthened by the inclusion of details of how the equipment will help to secure new business and any estimation of the increase anticipated, calculations on how it is expected to reduce existing product costs and how it will speed up customer delivery. In addition it is helpful to include detail on expected impact on quality and consistency of the end product and how these improvements will increase the business’s competitiveness.
Essentially the more information a business can provide to demonstrate the impact of automation, the better chance they have of getting their funding application approved. This information demonstrates that the investment is valid and that it will support the business’s growth.
How crucial is having a solid business plan when applying for credit?
A solid business plan is always good business practice and will enhance the funding application. However in reality the scale of investment often dictates the need. If a business is investing more than £100k, it is usual that a business plan will be in place which clearly demonstrates how the investment will payback over the term of the funding agreement.
How has the recent upswing in UK manufacturing changed the way banks interact with manufacturers looking for finance?
The manufacturing sector has always been very important for banks. For us at Lombard our roots have been firmly established in the sector throughout our 150 year history and this is very much still the case today. What has changed is that banks recognise the need to listen to manufacturers and to gain a greater understanding of their needs. This is why Lombard works very closely both with manufacturing trade bodies and directly with manufacturing businesses, to ensure that we deliver the right funding solutions in order to continue to support the growth in manufacturing.
What are the major risks banks are looking for in manufacturing businesses applying for credit and are banks trying to find ways to assist businesses overcome these obstacles to be approved for finance?
A bank needs to ensure that those businesses to which it lends can service the debt, i.e. meet the monthly repayments. This is important to both the bank and ultimately the manufacturer. To this end, the bank needs to look at the manufacturer’s financial circumstances and this will include the business’s cashflow and key indicators such as turnover of stock, paying its suppliers and how quickly its own invoices are being paid.
Banks provide a wide range of funding solutions available to manufacturers so it may be a matter of finding the right one to meet individual circumstances. This could be a traditional overdraft, invoice discounting, asset finance or possibly the RBS tooling finance product.
It’s important that manufacturers speak to their bank as early in the process as possible and that they provide as much information as they can in order to ensure that the funding method best meets their specific needs and consequently that the payback method maximises the impact of the introduction of automation thereby driving forward business objectives.