Business investment is a crucial element of economic recovery. Richard Hill, Head of Automotive and Manufacturing at NatWest and RBS explains why it is important to invest to maximise companies’ capacity and potential.
EEF recently released a report (sponsored by Lombard – part of the Royal Bank of Scotland)[1] that looked at the current situation and investment intentions of engineering companies in the UK.
One fact in particular stood out: with the exception of a five-year period before the onset of the financial crisis, annual levels of investment spending in the UK have been pretty much flat since the late 1990s. Total UK business investment in 2013 was £123.6bn: 8.1% of annual GDP. While that may look impressive, when set against the economy as a whole and measured against competitors such as Germany and the USA, it is not – and it is lower than it was in 2008.
The first question is: does it matter? The answer is a very definite yes. Investment is necessary in order to increase capacity and raise – or even simply maintain – competitiveness.
The period since the turn of the Century has seen huge advances in technology, which simply cannot be ignored if businesses are to remain globally competitive. We are all aware of the advantages the Far East has enjoyed over the past few decades. These have been heavily based on low wages and that particular advantage is being eroded but business in the UK will not be able to redress the balance if it is not able to compete effectively with other countries, which have invested in automation and advanced equipment.
A manufacturing forum that we held with experts across the industry found that there is increasing pressure from OEMs for the Supply Chain (SC) to invest; it is essential that capacity in various areas, including technical and physical, should be increased in order to facilitate partnerships in product development and innovation. Currently, it appears that 40% of the UK SC is actually ‘ungeared’. There is evidence of caution about commitment to large projects among engineering companies, or even of nervousness – which is not altogether surprising.
Part of the challenge in building confidence to invest for future growth, for RBS and other banks supporting businesses, is how to encourage still-cautious companies to invest. We have worked hard to develop a number of innovative ideas and funding methods in order to break out of the traditional approach and to make funding more responsive and appropriate to customers’ needs.
Tool up
Earlier this year we developed our Tooling proposition – specifically to enable manufacturers to obtain the bespoke tools required to complete specific contracts. Something that had been identified by the industry as a very significant factor restricting cash flow.
Typically the supplier is expected to fund new tooling components specified by manufacturers, however the tooling and intellectual property is ultimately owned by the car manufacturer – making tangible security for any loan difficult.
The proposition utilises the bank’s trade finance expertise and specifically a trade loan structure. The trade finance team will tailor the loan based on the schedule, contract and various stages of the tooling manufacturing process. The team will monitor and control the loan at every stage of the tooling manufacturing process – paying the tooling manufacturer as necessary at key stages, on behalf of the bank’s customer.
A production line is an expensive piece of infrastructure and the bank’s response has to be tailored to suit the real world. There is a lot going on and we may not have come up with a definitive answer and for that reason we want to hear from the industry. For example, is the traditional five-year term for purchase of capital equipment, with residual value at the end of the term, viable these days? The traditional metal-forming business would have equipment that would be used to form metal in one way or another over a long life – but as OEMs in a number of industries move towards lighter materials, the need will be for a whole different range of equipment, and shorter working life.
We have been asked for longer financing periods, which could have the effect of reducing repayments and thus improving cashflow – but we are aware that our customers may want to pay back as soon as possible. The tax regime is not as accommodating as it once was and that, too, will have an impact on how businesses want to be financed.
We have invested in training our own staff and in raising their skill levels and we continue to do so with our specialist Manufacturing Relationship Managers based across the UK.
Industry is moving at accelerating pace an we are seeing changes in industrial cycles – they are getting shorter and we as an organisation are working to find ways to meet our customers’ requirements in today’s circumstances, not those that existed a decade and more ago. We are looking ahead and seeking to develop ways to predict customers’ asset needs two or three years from now, in the context of developments that are being worked on now. The Tooling Fund is an example of our response and we are working to anticipate future needs, rather than just to react to them.
KTC (Edibles) Ltd secures £33m financing
KTC is a £200m turnover business with 220 employees, operating from manufacturing sites in Wednesbury (its HQ) and Liverpool. Its flagship brands, KTC and Sea Isle, are familiar to Asian and Afro-Caribbean consumers both in the UK and through its important export arm.
RBS Invoice Finance supported the businesses provided a complete funding package including a £33m Asset Based Lending (ABL) facility, transactional banking, import letter of credit and bonds and guarantees. The ABL facility consists of working capital and term loan funding against the company’s Receivables, Inventory and Property. The package is enabling KTC to support its growth strategy.
NutraHealth perks up with £20m funding deal
NutraHealth PLC, founded in 2004, is one of the largest manufacturers and distributors of vitamins, minerals and supplements in the UK. It sells directly to consumers and supplies the country’s major multiples and independent health food stores, along with international pharmaceutical and multi-national corporations. The Kings Norton, Birmingham-based company exports to more than 70 countries worldwide. It employs over 350 people at production sites at King’s Norton and Swadlincote, Derbyshire.
Its funding arrangement and refinancing package, which includes a £15m lending facility from RBS Invoice Finance, is enabling the business to boost sales of over-the-counter pharmaceuticals, to increase exports and to launch new product lines under its BioCare, Natural Wellbeing, Brunel Healthcare Manufacturing and Max Healthcare brands. Additional support was provided by Lombard, the bank’s Asset Finance arm, Lombard.
[1] “An Uncertain Return” – Investment Monitor 2014
