Manufacturers still wary of investing despite recovery

Lloyds Bank beats £1bn manufacturing commitment three months early
A report from Lloyds Bank has found that more

More than a third of UK manufacturers have no plans to invest in capital expenditure, despite the sustained economic upturn, new research commissioned by Lloyds Bank has found.

Nearly three quarters of respondents (74%) said they had no idea what the annual capital investment allowance was, with only 7 % correctly identifying the annual limit – the most a business can invest in plant and machinery and deduct from taxable profits – as £500,000.

The findings highlight the low level of experience of alternative funding sources such as asset based lending – only 5% had used it to fund capital expenditure in the previous five years – which suggests that manufacturers could be missing out on growth opportunities by not exploring all their financing options.

In research carried out before the Scottish referendum, Lloyds Bank found that more than a third of firms (35%) surveyed had no plans to invest in capital expenditure – an accounting term used to describe spending that creates future benefits – over the next five years. That figure is even fewer than the number (40%) who said they hadn’t committed any capital expenditure spend since 2009.

This is surprising given that business confidence in the manufacturing sector grew in the year to June 2014, with the confidence balance growing from 38% to 58% in the period, according to the latest Lloyds Bank Business in Britain report

The problem could be due to a lack of awareness of funding options, said Mark Parsons, sales and client director, Lloyds Bank Commercial Finance.

While twice as many manufacturers have used asset based lending in the past five years compared with businesses in other sectors, most of those that do plan to invest – or know how they would fund delivery of a major new contract – plan to use the same traditional funding options as have been used in the past.

More than a fifth (22%) of those manufacturing firms with investment plans intend to use business loans to fund growth in the next five years – compared with 17% who have used them in the past five years – with 13% planning to use overdrafts, against 13% in the past.

Similarly, 37% would fund delivery of a major new contract using business loans, while 21% would use an overdraft and 14% would use cash.

Parsons said: “The UK economy is experiencing a strong recovery and is predicted to be the fastest growing in the G7 this year, so it is surprising that so many manufacturers still have no plans to increase their capital investment levels.

“It may be that many manufacturers are not investing for the future because they are unaware of the funding options that are open to them beyond just taking a loan or using their overdraft.

“At Lloyds Bank we are committed to helping firms unlock the value in their assets with our wealth of experience.”

The survey did find that almost half (47%) of manufacturers plan to use loans less.

Parsons added: “A business that has capital tied up in stock, plant or property can turn these assets into cash, boosting working capital without slowing growth, using our asset based lending products.”

“With asset based lending, money is released into the business which can be used to expand, restructure, acquire new machinery or fund a management buy-out or acquisition.”

Almost two thirds (63%) of those that plan to invest over the next five years say they will commit more than 11% of their turnover to capital expenditure in the next five years, while more than one in 20 (7%) plan to spend more than 30%.

The survey also found that almost a third of manufacturers (30%) see consolidation as a possible route to growth in the next five years and are considering investing in a merger, acquisition or management-buyout.