Value for money

Institutional fiscal prudence in the aftermath of the unprecedented frenzy of unwise lending that gave rise to the banking crisis is now hampering the growth of UK industry as its recovery stirs. That, at least as far as we can tell, appears to be the view of a government desperate to see the growth of private business as an antidote to public sector job cuts and manufacturing recovery as a route to a better balanced economy. However, things are rarely as straightforward as they seem. If the financial institutions are as ready to lend as they claim to be, questions arise as to the price of borrowing and the conditions that attach and, for manufacturers, whether they have sufficient ambition, confidence or even need to do the borrowing and the growing. Such is the nature of financial dealings that not everyone wants to be named when it comes to proffering a view, but one leading timber products manufacturer in Wales made the point that while, as a well established business, bank finance was readily available, it was reluctant to take on more debt. "However, it's my view the banks are now very risk averse which makes it very difficult for many companies," its MD observed. "Banks have gone from being, in some instances, reckless in the good times to overly cautious at a time when they should be prepared to take calculated risks so as to play their part in supporting businesses that will contribute to the recovery process." Another, this time the boss of a home counties-based electronics manufacturer, said: "Bank finance is available to us and we are taking advantage of it, but there are more hoops through which to jump and I suspect if our results were not so good we might have to jump through even more." Another, less shy of the financial spotlight, is Frank Atton, managing director of Essex-based John Anthony Signs, who pointed out that while the banks are lending money they have hiked interest rates, despite a static Bank of England base rate, and, in addition, charge "ridiculous admin and renewal fees". He continues: "We have a good track record here at John Anthony and some excellent clients, and the banks know this therefore they will lend us money but require more personal guarantees, security and so on. The interest rates have gone up 2%. There is the 1% admin charge which turns into a 1% renewal charge every 12 months. On a £400,000 overdraft we pay £4,000 per annum on top. When you are fighting for survival and have supported the company personally in a fight that was never of your making, it's all a bit hard to swallow." As a national sign manufacturer, Atton's business is heavily dependent on the retail sector which has been a "frozen" industry since the beginning of 2009, he says, with no real signs of thawing even though, "some retailers - not many - are investing in the future with image and design". At Norfolk's FL Plastics, managing director Geoff Fitzgerald-Lombard turned to his bank's asset finance arm Lombard (no relation, he is quick to point out) and is a good deal happier with his experience. A small independent bottle blowing company, FL Plastics employs 24 people and turns over £2 million converting plastic polymers into plastic packaging by blow moulding and injection stretch blow moulding. It's a highly competitive sector in which the company has survived and prospered for 19 years during which it has supplied a range of customers including supermarkets - through their product filling partners - and proprietary companies like Next, Marks & Spencer and Molton Brown. Fitzgerald-Lombard is a man who says he favours long-term business relationships. "We tend to look carefully at the people we deal with and then try to stick with them. At the very outset of our business we raised some capital through Lombard and we have done so on a number of occasions during the course of our existence." NatWest, now a part of RBS (of which Lombard is a subsidiary), has been FL Plastics' banker from the outset. The company's latest purchase is a second machine of the same type the company purchased eight years previously and uses for a particular process, Fitzgerald-Lombard explains a little enigmatically, careful not to give away any trade secrets. As for the necessary finance, he says: "We didn't find it tough; we've had a long-standing relationship with Lombard. A straightforward approach solicited the right answer straight away." Explaining the imperative for the new purchase, he says: "The first machine we bought has and still is serving us well, but we have grown that part of the business sufficiently to require a second. It gives us greater flexibility; we were in danger of losing business share because of extended lead times. Because we work 24 hours a day and, for a large part of last year, six and a half days a week, we didn't really have anywhere else to go other than to increase capacity. Limiting the company's horizons would have been very short-sighted." On the back of the new asset, daily production was boosted by 35,000 units and £300,000 of annual sales revenue was added. With many manufacturers reluctant to incur debt, even for much-needed new plant, why did FL Plastics opt to take on a hire purchase commitment? Its MD's answer is straightforward: "Funding out of earnings would have placed an impossible strain on cash flow - we took advice and overwhelmingly the decision was that this was the right way to tackle it. At the end of the term the equipment is ours. That was the way the first machine was purchased eight years ago and after about five years we'd covered that; the machine remained with us and has given us good service." The cost this time was between £250,000 and £300,000 depending on exchange rates; a sum FL Plastics expects to recover in five years. In fact, those exchange rates - the machine is Japanese - are the only blot on the deal's landscape. "There are always bureaucracies that you have to find your way around and get right; it wasn't particularly difficult," says Fitzgerald-Lombard, "but I suppose the most difficult part of the process was the fact that the organisation that we were dealing with would only deal in Japanese yen and I found it somewhat surprising that an organisation like RBS or Lombard was not able to deal in that currency or to arrange currency between sterling and yen. I thought that was a bit backward." Looking ahead across his wider customer base, Lombard managing director Alexander Baldock understands that investment by UK businesses in the past two years has slowed considerably as a result of the economic downturn. However, he is optimistic for this new year. "We believe that many of those businesses that have been putting off replacing existing equipment, or delaying investment in additional plant and machinery, will make the necessary financial commitment in 2011 in order to make certain that they are prepared for the anticipated economic upturn, and also to ensure that UK plc remains competitive in the global arena," he says. And he is not too shy to promote what he sees as the virtues of asset finance, a route he believes has, in the past, been underutilised. "It preserves cash in the bad times and powers growth in the good," he asserts. "It can reduce the risks associated with ownership, and sale and leaseback will free up value within an asset for those companies lacking cash resources to fund growth. In essence, asset finance should be seen as an additional credit line - a flexible and committed facility to complement existing bank credit lines. Therefore manufacturing businesses can future-proof their investment as it provides the flexibility to update the production line as and when the latest technology is released." It is a view that is endorsed by a relatively new player in the asset finance business - Hitachi Capital Business Finance - where director Marie Dunkley recruited a direct sales team back in September to target manufacturing sector customers. "We have funds and are looking to lend," she says. "The assets that are of interest to us are non-bespoke assets so standard assets, together with good credit covenants. The key to who we lend to is in understanding the customer's needs, impact on business and from there we would look to tailor the funding solution that makes sense to both parties." Hitachi has, says Dunkley, a rare appetite for what she calls "a true residual position on equipment". Standard hire purchase deals where the customer wants ownership at the end and is prepared to pay interest over the capital value are on offer, but operational leases are where the residual value option comes in. "If the equipment value was, for example, £100,000 and we think it will be worth, say, £20,000 at end of the term, we can take a 'residual' position which lowers the rental for the customer and has good balance sheet implications." Like Lombard's Alexander Baldock, Barclays Corporate's head of asset finance Alex Brown says there's no sector of business upon which the recession of the past two years hasn't had some impact, although recently he says several viable opportunities have come through with customers acquiring new printing presses with exciting embedded technology, process manufacturing plant, and precision engineering equipment like the Makino CNC machine for a car manufacturing sector customer. Be that as it may, his colleague, the bank's head of manufacturing Graeme Allinson, says it's not enough. "Levels of investment in UK manufacturing prior to the events of the last two years were relatively low compared to our peers; they have fallen a long way and to me they don't seem to be bouncing [back] as quickly as I would have liked," he says. He simply doesn't think demand is at the level it should be, particularly bearing in mind relatively strong UK and world economic growth rate predictions. "UK manufacturers continue to be very cautious about taking debt onto the balance sheet. They went into this recession with relatively little debt on their balance sheet and that was a positive thing but now, as a banker, I would be looking for manufacturers to want to take on more debt. One of the first [visible] signs would be an increased desire for investment - purchasing machinery. To grow and expand you need to be investing in new machinery as you continue to keep an eye on costs - driving them down to get yourself more efficient, and that requires investment, too." As far as the availability of investment capital is concerned, Allinson believes it is more a question of lack of demand than lack of supply. Where there is a desire to invest, he says, "the [manufacturers] I talk to seem ever more inclined to invest from surplus cash rather than taking on additional debt." And in that, our canvassing of manufacturers (see box), proves him to be right.