Helping UK manufacturing finance its future

As the UK prepares for a fundamental shift in its relationships with the rest of the world post-Brexit, a lot of talk is centring on trade relations and, more specifically, the balance of imports and exports.

Manufacturers are embracing servitization in order to deliver greater customer value and generate recurring revenue streams – image courtesy of Pixabay.
The standard type of asset finance, hire purchase, spreads the costs of capital investment out over time like a loan, but without the risk – image courtesy of Pixabay.

Over the past 30 or 40 years, the UK has become a net importer of most manufactured goods and produce. The process of globalisation has cast countries like ours, with high living, labour and production costs, into the role of consumer, sourcing the goods we need from producer countries where the same overheads are much lower.

However, with the British economy flatlining and much uncertainty on the horizon, the sense of that model is being called into question. As pointed out in The Manufacturer recently, reshoring production back to the UK will reduce the economy’s reliance on borrowing money to pay for imports, while creating jobs and encouraging investment.

For the long-term economic stability of the country, this makes a lot of sense. But it is not quite as simple as manufacturers deciding to wind up a factory overseas and opening a new one in the UK. That switch in itself carries large financial implications. Whatever the long-term benefits, it has to be viable in the short to medium term, too, before it happens.

If manufacturers are going to bring production home, they need help to invest in rebuilding the industrial base.

Another issue covered extensively in this publication in recent times is digitisation. Just a few weeks ago, it ran a story reporting that 44% of business leaders in the UK believe that digitisation is not happening fast enough. The point is that advanced technologies can help boost efficiency and productivity in a way which will offset the economic uncertainties ahead. But unless businesses are quick about it, those benefits will be felt in time.

Again, this makes sense. But when margins are being squeezed and cash flow is tight, where are manufacturers to find the capital to invest in the latest digital infrastructure?

Flexible finance

At its strongest, Britain has always been built on a spine of industry and manufacturing. It can be again, but first manufacturers need help investing in building the factories and processing plants which can drive economic growth in the 21st Century.

Flexibility will be the key. Not only do businesses need help spreading the load of capital expenditure so it fits in with their cash flow, they also need protecting from having depreciating assets on their books. This is especially important when investing in digital technology, where last year’s innovation can so quickly become old news.

For these reasons, asset finance can play a big role in helping to reinvigorate UK manufacturing. The standard type of asset finance, hire purchase, spreads the costs of capital investment out over time like a loan, but without the risk of the loan being called in unexpectedly. This is because, with asset finance, it is not money which is borrowed, but the asset you need directly. The financier purchases it and then lends it out on a hire arrangement, with fixed, predictable payments until the cost of purchase has been paid of.

Even more flexible options come from leasing arrangements. When plant machinery had a shelf life of 20 or 30 years, outright purchase made sense. But if you are looking at a computerised system which may need updating in two to three years, at which point it has no residual value left, leasing can be a much more viable option. Under a finance lease, you can even leave your options open until the end of the contract, and then make a decision whether you want to pay off the balance and buy the asset outright. Leasing also has the attraction of turning equipment acquisition into an operational expenditure, making for much easier bookkeeping and greater stability over time.

Bringing production home to a vibrant, high tech manufacturing sector makes a lot of economic sense for the UK. Our manufacturers have the entrepreneurial spirit to make it happen. But they will need help with the right tools to make the transformation.

Find out more

Peregrine Leasing is one of the UK’s leading providers of asset finance, with more than 25 years’ experience. Visit www.peregrineleasing.co.uk to find out more.