Plant & Works Engineering
Accessing alternative funding
Published:  10 November, 2015

The majority of engineering and manufacturing companies operating today have weathered the 2008–13 economic crisis but they increasingly face a new challenge – accessing appropriate funds to now develop and grow their businesses. PWE spoke to Robert Keep, the Principal at Norton Folgate, leasing and financing specialists, who explains how alternatives to bank overdraft funding can be successfully accessed.

A strong British engineering sector is vital to the long term sustainability of our economic recovery, that’s why the government’s industrial strategy is an intrinsic part of helping engineering companies and manufacturers across the country create jobs and wealth, and give them confidence to invest. Estimated at contributing £455.6 billion (27.1%)1 of the total £1,683 billion UK GDP in 2014 the engineering sector has the potential to contribute an extra £27 billion to the UK economy every year from 2022. This is subject to training the quarter of a million additional people needed to fill the new jobs in the same timeframe.

Over the past few years many organisations, in addition to implementing pay freezes and job cuts, had to significantly tighten their belts. This included cutting back on all but essential purchases, reducing the frequency of scheduled maintenance and extending the operational life of vital pieces of plant and equipment. However, one of the unseen ‘problems’ during this period has been a change in business attitudes and a significant shift towards being more risk adverse. A rather daunting 49% of small business refer to themselves as permanent non-borrowers, that is to say that they have not borrowed in the last five years and they have no immediate intention of doing so.

“Being debt free has become an over-riding aim for an increasing number of businesses,” explained Robert Keep, the Principal at Norton Folgate. “But this aversion to taking on any form of borrowing and a ‘status quo’ attitude to business finance means there is now an increasing reluctance to financially plan for the growth opportunities of the future – jeopardising businesses and stifling potential commercial growth.”

High Street banks were the traditional first point of contact for any business wanting to access funds but recent events have seen little new finance flowing into the SME sector from ‘traditional’ lenders, resulting in some organisations finding it hard or even impossible to access capital. Over the past 18 months, the lending process has become far more formulaic, closing the door on some if the required criteria are not completely met. This has resulted in the growth of ‘alternative’ organisations developing innovative and flexible financing packages and being willing to work with borrowers to help develop strategic plans and minimise risk. While overdraft funding is now reportedly growing with 84% of applications being successful, this particular statistic is viewed with a degree of scepticism by those in finance. Many suggest that the statistic itself is flawed because the new breed of clearing bank Relationship Manager has become increasingly adept at making sure that only those business with a greater chance of acceptance are passed up to credit teams for approval. One commentator recently suggested that actually, if taken from cradle to grave, the effective decline rate for overdrafts is closer to 80% than 20%.

New research by one accountancy software organisation2 suggests that the government may be failing many UK businesses; with as many as 60% of SMEs having to turn to re-mortgaging, using personal savings or family loans in order to keep their business afloat. They also said that having to work in excess of the 48-hour working week, working weekends and not taking their full holiday entitlement are also quite common place, and a staggering 84% reported never having received any financial or other type of support or advice.

Robert Keep stated: “Businesses need to review their approach to borrowing as now is the time they should look to invest in their future taking advantage of current favourable credit conditions; if they don’t they may live to regret their inaction.”

“Continued delay means many businesses will probably ultimately end up paying far more to access vital capital needed to manage day-to-day operations or fund future expansion if they wait until any rate increase is introduced. What’s more they also run the risk of being behind the growth curve, potentially working in more competitive and pro-active commercial markets.”

The Bank of England has held interest rates exceptionally low at 0.5%, the lowest on record, for more than six years. Similarly central banks around the world have held interest rates at emergency levels since the financial and economic crisis. However market expectations are that Threadneedle Street could be the first to start edging them back upwards – and it’s believed that this could start happening as soon as the turn of the year. This is largely to do with the underlying success that the British economy is enjoying when compared to those other economies that are immediately comparable.

While traditional banks understand borrowing against tangible assets, quite often engineering companies need to borrow to fund a mix of initiatives in order to deliver a complete solution. Yes, there may be plant and equipment, but there may also be a need to renovate a facility, purchase materials, or acquire innovative technology and intellectual property. By understanding these ‘intangibles’ the new bread of independent financiers have the flexibility and ability to work with the organisations and put together an affordable loan package, backed up with sound financial and commercial guidance.

Other sources of funds also exist but accessing these can be both problematic and come with more associated risk. There is crowd funding, but enticing a myriad of typically small investors is not the easiest route to take to attract and secure the money needed plus it’s never guaranteed. Business funders and venture capitalists can also be accessed but they typically demand a large slice of the business in return for their involvement. Peer-to-peer lending is growing in popularity amongst creditworthy businesses as well as invoice finance as they provide a quicker turnaround but the amount of funds entering the market from this quarter are still quite limited.

“Our business finance system is not where it could or should be, and some of our most promising companies continue to struggle to get the finance they need to grow,” continues Keep. “The business lending sector is not overtly regulated; however, the poor decisions of a few have in the past seriously impacted the many. Whilst the sector wouldn’t want additional red-tape or restrictive legislation, we collectively need to shake off the perception that we are unsympathetic to businesses. We need to adopt a more pro-active, flexible and conducive attitude towards managing risk and funding business operations and growth in a structured and sustainable way. This in turn will encourage business owners secure viable funding to run and expand their businesses in a responsible way as it provides them with a level of freedom to achieve this.”

Another piece of recent research shows that SMEs in particular are generally feeling more optimistic about their prospects; but small firms are also now waiting an average of 72-days to get invoices paid, putting greater pressure on cash flow. Other factors that will undoubtedly affect business decisions over coming months include recent budget announcements like the rise in the living wage, the mandatory introduction of work place pensions for all employees in small businesses and the investment allowance being slashed from £500,000 to £200,000 at the end of the year.

Reduced tax and business rates are regarded by well over half of business managers as being one of the key things that Government could initiate to improve the economic environment; followed by reduced red tape (56%); controlled energy/utility costs (31%); and measures being brought in to tackle late payments (12%).

“Access to appropriate funds is vital if UKPlc wants to continue to flourish,” concludes Robert Keep. “A rise in interest rates is inevitable at some stage, so businesses looking to sustain regular business and grow should regularly re evaluate when, from where and how they could raise finance needed. They should even consider getting a provisional facility in place to capitalise on business opportunities now while loan rates are still low. But it’s not just about access to appropriate funds. The new breed of financial institutions are also proving to be an important source of much needed business advice as they can be the perfect sounding board to help ensure that the business venture you’re embarking upon is grounded in sound commercial strategy. Access to funds and borrowing is not going to rocket overnight but if businesses do not take advantage of current favourable credit conditions in order to invest for their future they may live to regret their inaction.”

*Robert Keep is the Principal at Norton Folgate, the leasing and financing specialists that are an effective alternative to more traditional sources of funding for business.

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1 The contribution of engineering to the UK economy