Money for something

Posted on 1 Jul 2014 by Ruari McCallion

The banks are extending their reach into areas that were either the preserve of other financial institutions or previously restricted to large organisations. Ideas like Asset Finance hold out the promise of more flexible financing arrangements; how attractive – and available – are they? Ruari McCallion explains.

Dire Straits sang about ‘money for nothing’ but those of us who occupy the real world know there is no such thing: banks and sources of finance always want something in return for their support. But if demand for something expands then both experience and economic history indicate that ways of satisfying it will multiply. As it happens there is a report just out that makes very clear that seriously creditworthy clients, potential and actual, are looking to invest for expansion: “Leading from the Middle”, written by Prof Stephen Roper, professor of enterprise and director of the Enterprise Research Centre at Warwick Business School and sponsored by GE Capital.

The report paints a positive picture. The UK’s mid-market companies are, on balance, rather positive about the coming year and are looking to invest in plant, equipment and people. The banks are saying now – quite loudly and clearly – that they are interested in expanding their provision to growing companies and they seem to have identified companies outside the ‘large’ sector as worth spending time on. This will be welcome news to companies such as Cutting Technologies Ltd, which enjoys a turnover of around £2.6 million providing specialist laser cutting and engraving services to manufacturing and creative businesses from its facility in Barnsley, Yorkshire. It bought a new £500,000 Bystronic Fiber laser cutting machine from a German supplier, through an asset-backed finance arrangement with Deutsche Leasing – a hire purchase arrangement, in effect. The experience was not straightforward, unfortunately.

Slow hands

“We had to pay the VAT upfront, which meant that we needed a £50,000, short-term facility,” said Jane Robinson, director of the company. “Our bank has our acounts and they could see that the VAT would be coming back. The three directors – whose sole source of income is the company – could go online and borrow £50,000 each, pretty uch then and there, but we found that the company had to go through a whole load of hoops and provide a lot of information and security. It took a month to secure and sort out, which is puzzling.” When asked whether other sources of funding, the story was not much better.

“Our other issue was with the Regional Growth Fund,” she said. “The Department for Business, Innovation and Skills gave provisional approval to Deutsche Leasing to distribute a tranche of Regional Growth funds. We went through a very lengthy and much-delayed process. When we arrived at the point where the machine had to be paid for we expected grant funds to be available – but they were delayed. When you are in a 12-week cycle and have to pay, these delays are simply not acceptable.” Ms Robinson concurs that the money is available and, as a small company, Cutting Technologies is used to being agile and jumping to get where it wants to be but much-trumpted sources of finance seem to have got in the way.

Leading form the middle

“Leading from the Middle”, written by Prof Stephen Roper, professor of enterprise and director of the Enterprise Research Centre at Warwick Business School and sponsored by GE Capital, looks at businesses in the “Mittelstandt”, the mid-market area that seems to be the engine for serious growth. It finds that UK companies are achieving similar levels of revenue growth as their German equivalents and with similar indications of confidence in both national and international markets. But UK mid-market businesses seem to be rather more optimistic about their futures than the Germans and very much more so than French and Italians. Fifty-one per cent of UK mid-market businesses saw increase in headcount last year and just 20 per cent said they cut back. The equivalents for 2012 were 30 and 26 per cent, respectively, and UK firms across the board expect revenue increases of over six per cent this year (3.5 per cent in 2013) so the process seems to be accelerating.

Divisions within the mid-market are into ‘growth champions’ (the 13 per cent businesses who saw growth of at least 10 per cent in 2013); ‘growers’ (a quarter of the total – up five to nine per cent); and even the ‘marginal’ group (just over one-third; up one to four per cent). That is a lot of increased business and it is interesting to see where the ‘champions’ are looking for their future increased business. Around one in five is targetting mergers and acquisitions; an above-average 14.2 per cent is looking to grow exports; and they are also more likely to register patents in the coming year. The report found that they are more likely to be maximising returns on their ‘knowledge investments’ in other areas, including IT.

“The Regional Growth Fund actually got in the way,” she said. “It was far easier and simpler to deal with an asset finance company than with the bank. In the end, we borrowed £350,000 from Deutsche Leasing and it was sorted in a week. The bank took much longer.” Arnab Dutt, managing director and owner of Texane Ltd has a slightly different perspective. His company, based in Market Harborough in Leicestershire, makes specialist heavy-duty polyurethane components such as solid tyres, buffers, anti-vibration pads, heavy duty step and chain wheels for mass transit escalators, moving walkways and airport baggage handling systems all over the world.

A whole new world

“The reaction of banks to the financial crisis was to cut back on lending and to rebuild their balance sheets,” he observed, but he is not convinced that things have moved on – at least, not sufficiently. “Their lending criteria does not appear to have changed. It isn’t nuanced and they still don’t understand business. Five years on from the crisis in the UK, the system for small businesses hardly seems to have changed at all.” He has not seen evidence that th high street banks have the same level of commitment as in “the old days”, the time that he describes as ‘proper banking’. It would appear that the main banks have a challenge on their hands, in convincing people like him that they really do mean business. But he sees positives from the situation.

“It has led to a huge growth in asset finance,” Dutt said. “The thing about it is – with asset finance, they have security: the finance company owns the machine till they have received the last payment. The lenders may not want to commit less than £150,000 but businesses can borrow at rates that are historically rather good. It makes sense and it is a good way of making capital investment.” He went on to say thay he is seeing lots of smaller companies going for asset finance and readily agrees that it is, in effect, hire purchase. But where do companies go for less than £150,000?

It takes two…

“There are specialist companies that will arrange that sort of finance. The rates and deals are not as good as the bank, though,” he explained. But he argued that smaller businesses, start-ups and the like – the acorns of tomorrows manufacturing oaks – need a variety of sources, especially as their biggest hurdle is likely to be credit ratings. “I want to see more challenger banks and more competition. We deal with two banks now. We have a new business and we have started dealign with Santander. If any one bank has all your business, they forget about you.if they know there is another player around, they will try harder.” But where do companies find other sources? Cenydd Thomas, corporate finance manager at UHY Hacker Young and based at their Newport office in South Wales, knows a few – and they include high street banks.

“I think that the banks’ commitment to the market is real,” he said. He advised taking a step back and asking why. “They want to be able to service their customer base in all sorts of ways. Asset-based finance is attractive; they will have the asset on the books and they always prefer to lend with security.” The number of independent players coming in has had an impact, as well; the banks are seeing their market being encroached upon.

Back together again

“The scale of competition has changed,” Thomas continued. “The number of alternative financial avenues is now so large that they need to work to maintain their relationships.” Banks have also taken “a pasting” on their investment banking business, for example.

“Asset finance is the sort of straightforward lending they should always have been doing,” he said. “Their involvement is not so much about going into a new area as going back to areas they had abandoned.” They also have an advantage over independents, who know only whether payments are being made; banks have much more information about customers. That is now good news for customers.

“Every deal we have been involved with over the past 12 months has been very keenly fought on prices,” said Thomas. Along with invoice financing (factoring) and other tools, smaller businesse may find themselves spoilt for choice.