Deal or no deal

Meet our manufacturer looking for investment… We're a 65 year-old SME manufacturer producing LED lighting and are on the verge of a £4m export order to China. We have also lined up another £1.5m deal to a building contractor in Mumbai. The trouble is we can't deliver on these contracts with our current ageing plant. We will need to spend £1.5m on upgrading machinery and our factory fixtures and fittings. We're unable to draw this from our cash reserves, which have sustained us through the recession and the directors are very nervous about offering a personal guarantee. Our turnover was £2.5m in 2012.What can your bank do for me? I'd appreciate any APRs/details on pricing. 1 Santander "After gaining an in-depth understanding of the business and its trading cycle, a relationship team would visit the business to discuss the specifics. The team would include a relationship director, trade finance specialist, asset backed lending specialist and potentially a treasury specialist. "First, we would look at the company's costings for the capital expenditure requirements and consider exactly what assets are required – we could look at options such as hire purchase or a lease purchase.   "The trade finance specialist would discuss export finance and how the Government's UK Export Finance Scheme could assist. Our recommendation would be to get a confirmed export letter of credit from the buyers in India and China that is an irrevocable undertaking to pay provided the documentation is in accordance with the terms and conditions. "We would then look to structure Pre-Shipment Finance against Export Letters of Credit. Generally termed 'Loans against Exports', this is more specifically the finance of the manufacturing process. These facilities are revolving loans for a specified duration and would be granted to the company to enable it to buy raw materials, manufacture goods and pack them pending shipment and subsequent presentation of documents under the Export Letter of Credit." 2 Barclays "Barclays works with businesses to ascertain what would be the most appropriate lending product to suit the needs of the business based on the amount they need to borrow, over what time period and what the money is to be used for. "Lending decisions and pricing will vary by customer based on a number of factors including previous, current and projected business performance as well as the amount and type of security/collateral that the business can provide." 3 Lombard "This business has two main problems it needs to address. First, how is it going to fund the export contract and secondly, the asset finance. "In terms of asset finance, in order to select the right product mix for the business it would be important to understand when its year end is, how much of its Annual Investment Allowance is available and the likely assets it will purchase. For those assets linked to the factory fixtures and fittings, it's likely that a traditional ownership product such as lease purchase would be appropriate. This allows the business to make regular payments over a specified term and take ownership once the final payment is made. "An ownership product may also be appropriate for the plant and machinery, but the business should investigate products that give it the benefits of ownership with options at the end of the contract. These user-based products, typically structured with a residual value amount, can be very flexible. For example, they can allow the business to return the asset once the contract is fulfilled, refinance the residual value in the asset over a further term if the business wins additional contracts, or sell the asset to an independent third party and bank the difference once the residual value is repaid. "As the business would preferably not opt for personal guarantees, an asset finance facility is an ideal solution as, for the most part, the lender's security is in the asset itself. The actual APR on the deal would depend on many factors, but it's definitely worth looking at a fixed rate product to lock in the benefits that the current low interest rates offer." 4 NatWest "The SME should think about how it's going to be paid for the China and India contracts as the trade cycle may be elongated and require a large element of working capital upfront. "Ideally, the business should negotiate a large upfront deposit, sufficient to fund a large portion of their pre-shipment working capital requirements. "However, as they have not dealt with their overseas clients before, it is inevitable that the SME needs to provide an Advance Payment Guarantee (APG) to secure the deposit paid, which would enable it to be claimed back by simple demand under the guarantee in the event that the SME didn't perform its obligations under the contracts. Usually, if a bank is requested to issue an APG, it will require the cash received to secure the bank's liability, therefore providing no working capital benefit to the UK exporter. "The Bond Support Scheme from UK Export Finance (UKEF) is available to support specific export contracts with a tenure of less than two years where there is at least 20% UK content. If approved, UKEF will provide a guarantee of up to 80% of an APG, meaning the bank can release 80% of cash collateral held to the exporter. "For the balance, the UK exporter should require Documentary Letter of Credits to be issued. This is a bank guarantee of payment issued by the importer's bank in favour of the exporter." 5 Lloyds Bank "First, there is a requirement to upgrade the current machinery, which could be financed through the Lloyds Bank Commercial Finance team. Asset finance is a versatile way to fund the purchase of new machinery, avoiding the need to pay cash outright and easing cashflow through regular payments over an agreed period. "The Lloyds Bank Assisted Asset Purchase Scheme is offered as a part of our Regional Growth Fund programme. It provides qualifying businesses that are creating or protecting jobs with a grant towards purchasing new assets where they would not ordinarily be eligible for bank funding due to a lack of a deposit. "If the business had capital tied up in stock, plant and machinery or property we could help turn these assets into cash – increasing working capital without slowing growth. "Invoice Finance may well be an option for this business if they want quicker access to the cash tied up in their sales invoices. It gives almost immediate access to up to 90% of the value of the invoices, so the business does not have to wait to get paid. "We may be able to structure an innovative trade finance offering that would suit the business' requirements and possibly make use of the available Export Credits Guarantee Department (ECGD) support for exporters." 6 HSBC "There could be a wide number of solutions to support a manufacturer like this, who is looking to export to China.  Financial support could come from traditional trade solutions such as export documentary credits through to invoice/receivables finance.  The business owners' nervousness over offering a personal guarantee against a loan might mean that receivables finance is a better option for them, whereby the product is linked to sales growth and not secured on personal assets. "We would look to offer a solution that provided the confidence to compete with local suppliers by offering simple credit terms for payment.  We could also provide the buyer risk assessment and protection against non-payment along with next day funding against the invoices issued, providing peace of mind. "It's also important to look further into the supply chain and consider the financial efficiencies around sourcing materials to fulfil the contract – for example what are the terms of trade for importing components and how can they be optimised? One thing many of our clients do is use the working capital generated by our facilities to negotiate early settlement discounts and strengthen supplier relationships, further improving the end-to-end flow of the opportunity.  HSBC has extensive expertise and experience in taking this wider view and can help put facilities in place."