The dragons' welcome

It's old but true: if you're broke and owe the bank £15,000, you've got a problem, but if you owe the bank £15 million, it's the bank that's got the problem. The entire business of sourcing finance is rooted here. Financial institutions want to lend money but only at minimum exposure to risk; borrowers want cash while surrendering as little as possible for it. However you find it, there's no such thing as free money, which is why many manufacturers prefer to fund new projects and products internally. This can, however, lose you more than you gain. Starving potentially profitable developments of cash can slow them down, allowing the competition to steal a march, delaying the point where they begin to pay back or missing the market altogether. Sometimes outside financial help makes more sense. The trick is making sure you find the best deal from what's on offer. Warmer climate There's a lot to choose from. Those who weathered the cash-strapped 90s - when the financial community regarded manufacturing as only one level up from a hole in its pocket - may retain a certain cynicism. But, in general, the lending climate is warmer and manufacturers can shed their defensive attitude. Take Barclays, for example. Last year, to the surprise of many, it announced a new £0.5 billion lending fund for growing manufacturing businesses. One of several moves to prove a serious commitment to industry, it included a complete reorganisation of the regional support service offered to potential and existing borrowers in the sector. It wasn't a flash in the pan - this year it has added another half billion and, according to Tony Walsh, its national director of manufacturing, the bank intends to keep this going. Obviously, altruism isn't high on the agenda; Barclays clearly sees good returns for its own shareholders in this. But credit where credit is due (pun intended), it is the only high street bank so far to make as strong a bid for manufacturers' business, even going so far as training its relationship managers at Warwick Manufacturing Group. What's more, it structures its support both regionally and by manufacturing sub-sectors. So, if you make control panels, you won't have to travel 200 miles only to find yourself dealing with someone who last assessed a chemical company. Walsh claims that Barclays lends to all types and sizes of manufacturer: "Our business model is £15 million turnover up to FTSE 200 and it definitely isn't all about the plc boys. We have some excellent private sector clients we lend a lot of money to." The bank has a slightly different model for SMEs below this threshold, but still courts their business. He points out that, in terms of margins, it is in Barclays' interests to spread its focus. "Often the plcs are multi-banked and for those that have a credit rating from an agency like Moody's, the prices they get from all their banks are really tight because of their strengths." Walsh believes the bank can be far more flexible than is commonly believed: "Manufacturing is characterised by tangible assets. So, if a company wants an overdraft-type facility for 12 months, we'd look to structure that against the assets of the business - be that debtors or stock - or a mixture of the two." Longer term funding is generally structured against plant, machinery or properties. None of that is new, but Walsh also points to more innovative arrangements, particularly for companies struggling to scale up production to meet new orders from blue chip retailers like supermarkets. With a firm contract in place, Barclays may be able to structure facilities so that the ultimate counter party risk is against the retailer, not the manufacturer: "We may be able to talk to our bankers and provide the finance on our balance sheet rather than yours. The benefit for the blue chip is that the funding is certain so they know they can work with that company." He maintains that, by taking a long hard look at the supply chain, the bank can often find new ways of actively supporting growth. Walsh also queries some of the thinking that often leads to companies seeking funding outside the banks: "The common misapprehension about the F word - factoring - is that you call in the factors when the banks won't do it. In fact, it's quite the opposite. We provide factoring to support growing businesses whose working capital demands are going crazy." His calculation is simple: in an overdraft, the bank will probably have loaned against cover from debtors. Typically, companies can look for a cover of twice debtors, so £2 million of debtors will produce a £1 million loan. In invoice discounting or factoring, however, you can comfortably expect 80% of debtors - an extra £600,000 facility for not much pain. He acknowledges that companies may get even more elsewhere: "We have to go through credit appraisal processes and there are one or two other asset financiers who are not in the same position. They will just push up their risk/reward curve beyond what we would be prepared to lend and want more money for doing so. Invariably, it means they will be lending to companies with weaker covenants than we would." Ins and outs The bank is probably the simplest solution in straightforward situations. Banks like clear trading histories and firm forecasts. In more uncertain circumstances like, for example, a management buy-in/buy-out (MBI/MBO), it's worth shopping around. Earlier this year, the old management team faced exactly this issue in trying to buy the firelighter business Tiger Tim from the Jeyes Group. Turning over more than £14 million, the company, with 100 employees and plants in Holland and North Wales, has a 30% market share. Obviously, it's a highly seasonal business so it needed a financial package allowing for fluctuating trading patterns. Its advisor, Grant Thornton, suggested asset-based finance from Venture Structured Finance. The offer, which combined confidential invoice discounting with a plant and machinery, inventory and cash flow loan, gave the team control of Tiger Tim in April. Chris Hawes, MD of Venture, explains that MBI/MBOs now make up around 60% of its business, alongside refinancing: "They can be risky. We will take that higher risk because we are closer to the understanding both of the business and the assets behind the business. We are prepared to leverage things at a higher rate than the conventional banks." Venture's client managers only deal with 15-18 clients because they need fairly intensive support and monitoring afterwards. Reading between the lines, companies who manage to squeeze out that extra bit of finance must expect the lender to keep a closer eye on their investment than is, perhaps, comfortable. On the other hand, Hawes is adamant that he doesn't ask for the umbrella back as soon as it rains. "We are in it for the long term, knowing that things will not go exactly according to plan. So we need to be there when that replanning happens." He admits to demanding a slightly higher rate for riskier ventures. "But it's nowhere near mezzanine rates. And sometimes we allow management teams to buy in without having to resort to raising equity. So our return is much less than an equity provider would expect and also, because we can leverage assets quite highly, it gives management a chance to keep control of the business." Tiger Tim's share of a stable market clearly made it a good investment bet. But who puts out the welcome mat when business failure threatens? Early in 2006 air-conditioning specialist Debonair experienced something dreaded by every small business. A major customer filed for insolvency, leaving it with huge unpaid bills. Director David Maddison says it could have been a big hit to take. Without outside help, he is in no doubt that the company would have faced real cash flow problems. Bibby Financial Services (BFS), which specialises in invoice finance, has devised an approach specifically for businesses in the construction sector. The seasonal peaks in demand for products like Debonair's increase business risk as inventories must rise without confirmed customer orders. It makes many lenders reluctant to help, a situation compounded by the complexity of stage payments and the multiparty working environment. BFS offered Debonair a package providing an immediate injection of cash against the value of outstanding invoices. As well as improving cash flow, it includes bad debt protection to prevent a similar situation threatening them in future. By linking cash supply to sales, funding grows along with the business. As part of the service, BFS provides a sales ledger and credit control service, chasing outstanding invoices. Leap forward If none of these channels fit, there's always private equity finance via a business angel, usually for up to £75,000, or a venture capitalist (VC) for larger sums. It's an entirely different proposition to the straightforward secured loan. On the plus side, it means someone else to add expertise and share the risk without any guarantee of return. On the minus side, it means they will own a chunk of your business and reap much of the reward if your bright idea turns into a stonking little earner. Yet it is undoubtedly one of the best ways of taking a real leap forward. Anyone heading this way, however, should do their homework thoroughly. Most people's experience is limited to Dragons' Den, the television programme where hapless (and often hopeless) would-be entrepreneurs ask five millionaires for backing for their business plans. Usually, the result is a verbal crucifixion. Even the few successful ones inevitably end up surrendering a lot more equity than they expected. Away from the cameras, the financiers are unlikely to be so rude but they will certainly be equally acquisitive and a lot more searching. It's also no quick fix. VC backing will almost certainly go through several stages and take many months to arrange. If you feel up to the grilling, there's a mine of useful information on the Business Link website. It also covers accessing funds from the government-backed Enterprise Capital Fund, designed for SMEs with high-growth potential who fall into the 'equity gap' between angels and VCs. Banks are often also a useful start point for an introduction to angels and VCs. Any company looking for finance will, regardless of the source, be taking part in a beauty parade. If the lender doesn't like your figure, you won't get crowned. So what makes you stand out from the rest? Over to Walsh again: "We have no policy to avoid a certain sector. We do a lot of appraisal on the business and the management, and invariably when we can't quite get there, it's because we think the management isn't doing the right things for the business. And then we'll say thanks but no thanks." What specifically would cause him to think twice? "Poor management controls; not meeting forecasts, etc. It really is about the people running the business. If you get the management right, even in a tough industry, things will be OK." It's old but true: if you're broke and owe the bank £15,000, you've got a problem, but if you owe the bank £15 million, it's the bank that's got the problem. The entire business of sourcing finance is rooted here. Financial institutions want to lend money but only at minimum exposure to risk; borrowers want cash while surrendering as little as possible for it. However you find it, there's no such thing as free money, which is why many manufacturers prefer to fund new projects and products internally. This can, however, lose you more than you gain. Starving potentially profitable developments of cash can slow them down, allowing the competition to steal a march, delaying the point where they begin to pay back or missing the market altogether. Sometimes outside financial help makes more sense. The trick is making sure you find the best deal from what's on offer. Warmer climate There's a lot to choose from. Those who weathered the cash-strapped 90s - when the financial community regarded manufacturing as only one level up from a hole in its pocket - may retain a certain cynicism. But, in general, the lending climate is warmer and manufacturers can shed their defensive attitude. Take Barclays, for example. Last year, to the surprise of many, it announced a new £0.5 billion lending fund for growing manufacturing businesses. One of several moves to prove a serious commitment to industry, it included a complete reorganisation of the regional support service offered to potential and existing borrowers in the sector. It wasn't a flash in the pan - this year it has added another half billion and, according to Tony Walsh, its national director of manufacturing, the bank intends to keep this going. Obviously, altruism isn't high on the agenda; Barclays clearly sees good returns for its own shareholders in this. But credit where credit is due (pun intended), it is the only high street bank so far to make as strong a bid for manufacturers' business, even going so far as training its relationship managers at Warwick Manufacturing Group. What's more, it structures its support both regionally and by manufacturing sub-sectors. So, if you make control panels, you won't have to travel 200 miles only to find yourself dealing with someone who last assessed a chemical company. Walsh claims that Barclays lends to all types and sizes of manufacturer: "Our business model is £15 million turnover up to FTSE 200 and it definitely isn't all about the plc boys. We have some excellent private sector clients we lend a lot of money to." The bank has a slightly different model for SMEs below this threshold, but still courts their business. He points out that, in terms of margins, it is in Barclays' interests to spread its focus. "Often the plcs are multi-banked and for those that have a credit rating from an agency like Moody's, the prices they get from all their banks are really tight because of their strengths." Walsh believes the bank can be far more flexible than is commonly believed: "Manufacturing is characterised by tangible assets. So, if a company wants an overdraft-type facility for 12 months, we'd look to structure that against the assets of the business - be that debtors or stock - or a mixture of the two." Longer term funding is generally structured against plant, machinery or properties. None of that is new, but Walsh also points to more innovative arrangements, particularly for companies struggling to scale up production to meet new orders from blue chip retailers like supermarkets. With a firm contract in place, Barclays may be able to structure facilities so that the ultimate counter party risk is against the retailer, not the manufacturer: "We may be able to talk to our bankers and provide the finance on our balance sheet rather than yours. The benefit for the blue chip is that the funding is certain so they know they can work with that company." He maintains that, by taking a long hard look at the supply chain, the bank can often find new ways of actively supporting growth. Walsh also queries some of the thinking that often leads to companies seeking funding outside the banks: "The common misapprehension about the F word - factoring - is that you call in the factors when the banks won't do it. In fact, it's quite the opposite. We provide factoring to support growing businesses whose working capital demands are going crazy." His calculation is simple: in an overdraft, the bank will probably have loaned against cover from debtors. Typically, companies can look for a cover of twice debtors, so £2 million of debtors will produce a £1 million loan. In invoice discounting or factoring, however, you can comfortably expect 80% of debtors - an extra £600,000 facility for not much pain. He acknowledges that companies may get even more elsewhere: "We have to go through credit appraisal processes and there are one or two other asset financiers who are not in the same position. They will just push up their risk/reward curve beyond what we would be prepared to lend and want more money for doing so. Invariably, it means they will be lending to companies with weaker covenants than we would." Ins and outs The bank is probably the simplest solution in straightforward situations. Banks like clear trading histories and firm forecasts. In more uncertain circumstances like, for example, a management buy-in/buy-out (MBI/MBO), it's worth shopping around. Earlier this year, the old management team faced exactly this issue in trying to buy the firelighter business Tiger Tim from the Jeyes Group. Turning over more than £14 million, the company, with 100 employees and plants in Holland and North Wales, has a 30% market share. Obviously, it's a highly seasonal business so it needed a financial package allowing for fluctuating trading patterns. Its advisor, Grant Thornton, suggested asset-based finance from Venture Structured Finance. The offer, which combined confidential invoice discounting with a plant and machinery, inventory and cash flow loan, gave the team control of Tiger Tim in April. Chris Hawes, MD of Venture, explains that MBI/MBOs now make up around 60% of its business, alongside refinancing: "They can be risky. We will take that higher risk because we are closer to the understanding both of the business and the assets behind the business. We are prepared to leverage things at a higher rate than the conventional banks." Venture's client managers only deal with 15-18 clients because they need fairly intensive support and monitoring afterwards. Reading between the lines, companies who manage to squeeze out that extra bit of finance must expect the lender to keep a closer eye on their investment than is, perhaps, comfortable. On the other hand, Hawes is adamant that he doesn't ask for the umbrella back as soon as it rains. "We are in it for the long term, knowing that things will not go exactly according to plan. So we need to be there when that replanning happens." He admits to demanding a slightly higher rate for riskier ventures. "But it's nowhere near mezzanine rates. And sometimes we allow management teams to buy in without having to resort to raising equity. So our return is much less than an equity provider would expect and also, because we can leverage assets quite highly, it gives management a chance to keep control of the business." Tiger Tim's share of a stable market clearly made it a good investment bet. But who puts out the welcome mat when business failure threatens? Early in 2006 air-conditioning specialist Debonair experienced something dreaded by every small business. A major customer filed for insolvency, leaving it with huge unpaid bills. Director David Maddison says it could have been a big hit to take. Without outside help, he is in no doubt that the company would have faced real cash flow problems. Bibby Financial Services (BFS), which specialises in invoice finance, has devised an approach specifically for businesses in the construction sector. The seasonal peaks in demand for products like Debonair's increase business risk as inventories must rise without confirmed customer orders. It makes many lenders reluctant to help, a situation compounded by the complexity of stage payments and the multiparty working environment. BFS offered Debonair a package providing an immediate injection of cash against the value of outstanding invoices. As well as improving cash flow, it includes bad debt protection to prevent a similar situation threatening them in future. By linking cash supply to sales, funding grows along with the business. As part of the service, BFS provides a sales ledger and credit control service, chasing outstanding invoices. Leap forward If none of these channels fit, there's always private equity finance via a business angel, usually for up to £75,000, or a venture capitalist (VC) for larger sums. It's an entirely different proposition to the straightforward secured loan. On the plus side, it means someone else to add expertise and share the risk without any guarantee of return. On the minus side, it means they will own a chunk of your business and reap much of the reward if your bright idea turns into a stonking little earner. Yet it is undoubtedly one of the best ways of taking a real leap forward. Anyone heading this way, however, should do their homework thoroughly. Most people's experience is limited to Dragons' Den, the television programme where hapless (and often hopeless) would-be entrepreneurs ask five millionaires for backing for their business plans. Usually, the result is a verbal crucifixion. Even the few successful ones inevitably end up surrendering a lot more equity than they expected. Away from the cameras, the financiers are unlikely to be so rude but they will certainly be equally acquisitive and a lot more searching. It's also no quick fix. VC backing will almost certainly go through several stages and take many months to arrange. If you feel up to the grilling, there's a mine of useful information on the Business Link website. It also covers accessing funds from the government-backed Enterprise Capital Fund, designed for SMEs with high-growth potential who fall into the 'equity gap' between angels and VCs. Banks are often also a useful start point for an introduction to angels and VCs. Any company looking for finance will, regardless of the source, be taking part in a beauty parade. If the lender doesn't like your figure, you won't get crowned. So what makes you stand out from the rest? Over to Walsh again: "We have no policy to avoid a certain sector. We do a lot of appraisal on the business and the management, and invariably when we can't quite get there, it's because we think the management isn't doing the right things for the business. And then we'll say thanks but no thanks." What specifically would cause him to think twice? "Poor management controls; not meeting forecasts, etc. It really is about the people running the business. If you get the management right, even in a tough industry, things will be OK."