Financing capital purchases in a tough climate

Posted on 7 Apr 2009 by The Manufacturer

Jeremy Salisbury, head of marketing at Brammer, a leading distributor of maintenance, repair and overhaul (MRO) equipment, looks at some of the support available to companies intending to finance new or replacement energy efficient equipment purchases

In the economic downturn, difficult credit conditions, volatile energy and commodity prices and budget cuts are placing increasing pressure on companies to revisit their overall strategies to remain competitive.

Against this backdrop it would be understandable if companies postponed investment decisions on new and upgraded plant and machinery. However, in deferring such investment decisions they may well be overlooking the cost savings available from energy efficiency projects — and there are sources of funding readily available to support investments in this area.

Whether a company’s focus is on short term cost savings or on itself for the long term, investment in new, more energy efficient equipment will help to reduce costs, increase production uptime and productivity and enhance competitiveness. Given the financial support available for companies to install more energy efficient products or upgrade control systems it makes sense in almost all cases for manufacturers to continue with investment in energy efficiency projects that will deliver cost reductions now, rather than deferring them.

Take an energy audit
But how do companies assess which aspects of their manufacturing operations are inefficient and need updating, particularly in terms of energy usage and carbon footprint?

Equipment manufacturers will usually only have knowledge of the sectors in which they work, and are normally biased towards their own products. But some independent suppliers such as Brammer can offer manufacturing companies impartial technical advice on energy efficient products, as well as undertaking ‘energy audits’.

An audit of this kind will provide an independent review of a company’s current production processes and offer impartial recommendations for the acquisition of new equipment which will result in reduced energy usage, deliver cost savings and help to reduce a company’s carbon footprint, without compromising on production output and efficiency.

Even companies that are already serious about reducing energy usage can benefit. Areas such as the use of unnecessarily big motors and ineffective use of resources like compressed air all contribute to energy costs, and often an independent view is a good way to identify this type of wastage. Once the key areas of inefficiency — and thus the products that need to be replaced — have been identified, the issue of financing new or replacement equipment can be addressed.

Carbon Trust extends helping hand
The Carbon Trust, a government-funded independent not for profit company established to help businesses and the public sector to cut carbon emissions, runs several financing schemes to offer companies a cost effective way to replace or upgrade plant and machinery with more energy efficient equipment.

The Carbon Trust’s Enhanced Capital Allowance (ECA) Scheme for energy-saving technologies is a form of accelerated tax relief which encourages businesses to invest in energy efficient plant and machinery — anything from air compressors to machine tools — from its highly extensive Energy Technology List (ETL). The criteria for the ETL change each year, and the list is updated each month. Companies purchasing products from this list can claim 100% first year capital allowance on their acquisitions, effectively writing off the entire cost against taxable profits during that financial year.

For example, for a business paying corporation tax at 28%, every £1,000 it spends on equipment from the Energy Technology List would reduce its tax bill in the year of purchase by £280. For every £1,000 spent, the generally available capital allowance for expenditure on plant and machinery would reduce that company’s tax bill by £56 in the year of purchase. This means, therefore, that the ECA can increase cashflow by £224 for every £1,000 spent during the year of purchase.

Interest free loans
As a further incentive for small to medium sized manufacturers to commit to more energy efficient manufacturing processes, the Carbon Trust recently increased the allocation for interest free loans. The Trust has doubled the maximum size of its interest free Energy Efficiency loans from £100,000 to £200,000 and increased the overall annual amount available for loans by 45% to £31 million.

This represents an excellent opportunity for SMEs to implement energy efficient projects and enjoy reduced energy consumption and improved profitability, while also helping reduce their carbon emissions. Indeed it is enabling companies to implement energy-saving projects on a much larger scale than ever before — including investment in equipment such as variable speed drives and high efficiency motors and gearboxes.

The loans are unsecured and repayable over a four year period. With reduced availability of alternative sources of finance, they may even be available for the total cost of projects which deliver the required reduction in carbon emissions. And meaningful reductions in energy bills could be achieved through the new equipment purchased.

Every successful manufacturing business should have a policy of regularly reviewing where and how energy is used, taking whatever steps are necessary to minimise expenditure in this area. In the current business climate, continuing to make the time to assess energy usage and acting on the findings to invest in new, energy efficient equipment — while taking advantage of the funding support available — makes good commercial sense given its affect on lowering costs and enhancing competitiveness.

Brammer is the UK division of Europe’s leading distributor of industrial, maintenance, repair and overhaul (MRO) products and services. The company’s product range covers bearings, mechanical power transmission products (including gearboxes and motors), pneumatics, hydraulics, seals, industrial automation as well as a complete range of tools, maintenance and health and safety products. It is an authorised distributor for many of the world’s leading brands including SKF, NSK, Renold, Gates, Flender, Siemens, SMC, Norgren, Festo, Rocol, Loctite and Schaeffler UK.