28 October 2015

Cheque mate

Banks have been all flattery as they try to woo back manufacturers who walked out over alleged indiscretions during the recession. So is the relationship back on? Max Gosney reports

The seven brand new CNC machines standing proud on the shopfloor of SME component manufacturer Groveley Precision Engineering are brimming with impressive stats. Some 75 ft-lb of torque produced at only 1,200 rpm, the throttle to reach 8,100 rpm in just 1.2 seconds and a £600,000 price tag. But, all are trumped by the eye-catching fact this equipment was bought, not from cash reserves, but in partnership with the banks.

Four years ago the scenario seemed as likely as a woolly mammoth wandering across the Pennines. “The relationship has died... I haven’t got a bank manager that understands my business,” Peter Bennet, Groveley’s MD told a Works Management crisis summit between SME operators and banking chiefs in October 2011. That summit saw two sides on the brink. Manufacturers slammed financiers over draconian lending terms and their general ignorance of manufacturing.

The banks, largely, appear to have taken the message on board reflects Bennet. “There has been a real effort to train up customer relationship managers. They have worked hard to obtain a far better understanding of my business and the crucial part manufacturers play in UK plc.

As well as showing the will, through asset finance banking chiefs appear to have found the way. The funding mechanism neatly bypasses the biggest flashpoint of our 2011 summit: personal guarantees. Manufacturing chiefs riled over having to put homes, cars and great aunt Maud’s prize china down as personal securities against purely business-based loans.

“The borrowing is against the machine, not my house. That’s fair,” explains Bennet of the £360,000(check) borrowed under asset finance agreements to fund Groveley’s CNC machinery. “It felt in the past that the bank didn’t trust us as a business because they wanted personal assets in as part of the deal and to take no risk whatsoever.”

A hidden catalyst at work
But, asset finance by itself doesn’t explain Groveley’s investment spree. There was a hidden catalyst at work here and it emanated from the unlikely source of Ten Downing Street. Groveley secured £84,000 towards the investment from the government’s Regional Growth Fund.

This £3.3bn fund launched by the Coalition government offers grants to private sector projects that offer bona fide economic growth. “It wasn’t an arduous process,” says Bennet of the application. “There was some form filling but it only took four months to receive the funding. We had to show the investment would safeguard existing jobs and create new ones.”

Fittingly the tip off for that funding came from none other than Groveley’s local bank manager. Proof of a relationship once pronounced dead that’s enjoying a profitable resurrection.

‘Bank manger to factory manager and it’s a goal’
A hundred or so miles up the coast, you will find another benchmark in better collaboration between factory boss and financier. Brighton & Hove Albion FC’s Amex stadium makes a fitting setting for this tale of two professionals striking up a winning partnership. On match day, Mike Punter and his bank manager will mull over the star buys they’d like to see on the pitch for the Seagulls and off it at Lancing-based tapes and conversions manufacturer, Parafix-where Punter is MD.

“My bank manager is a friend and we go to football together. When he’s in the area he’ll phone up and say: ‘do you mind if I drop in and use the factory as an office’, explains Punter. “Because of this he understands how my manufacturing business works. He knows my monthly performance against plan because we share management accounts updates with him and he’s got a rolling vision for the next five years. He sits as a quasi stakeholder and that’s been tremendous for us”

Parafix has invested almost £800,000 in two new production machines and a revamped clean room in two separate investments. He says: “There was a new market opportunity which required £770,000 of capex – that’s a lot of money. We had two acquire two new machines and did so predominantly through asset finance.”

Punter’s football loving bank manager was first pick when it came to financing the lion’s share of the support (£527,000. Another near £100,000 was financed from a second bank “The equipment we purchased is very niche, it’s not like buying a Range Rover. That’s why we had to bring a secondary lender in as security,” Punter explains.

Again it was the injection of government incentives that proved influential in bringing about the deal. Parafix secured £98,000 from the regional growth fund for the machinery in return for demonstrating revenue growth, guaranteeing current jobs and creating new ones.

“I’m amazed to hear about people who don’t use these grants,” says Punter. “In Hungary [where Parafix has a sister site] there’s much more use of EU money that’s managed through the banks. We even had people ringing up close to the completion of the deal and offering us more. They did that because other firms had applied for funding but not followed through.”

Will they go back to their old ways?
It all seems a far cry removed from anecdotes about bank managers laughing aloud at requests by manufacturing customers to renew overdrafts back in 2010. “We had a cold call by a manager at a rival bank,” reveals Bob Tunks, owner at Bishop’s Stortford-based BK Tooling, and another veteran of WM’s 2011 Finance Summit.

“At that time I was looking at a major expansion in our premises so I outlined expansion plan and explained that I was looking at around £100,000 in finance. Now we’re a £500,000 turnover company. The guy turned around and said: ‘in principle no problem’. He went said that the bank was actively pursuing manufacturers like us. All of a sudden we’re the good guys on the block.”

It’s a status as superficial as it is unsustainable warns Tunks. “A lot of this stuff we hear from the banks sounds like a lot of soundbites. It’s our moment in the sun now. But suddenly we’re getting a few negative economic figures coming out and now we’ll see how deep the commitment is.”

The same niggling doubts eek away at apparent converts like Bennet of Groveley. “I think it’s historic, we don’t quite trust the banks because we have long memories and remember what it was like at the last recession when the capital dries up,” he says. “There’s a lot of money out there and I think the banks have put their money where their mouth is this time. But the real acid test will come at the next recession.”

Bennet sums up the sentiments of many an SME manufacturer. These are businesses who’ve been happy to dip their toes into the water with asset finance-led equipment deals , but who are reluctant to dive on in to more significant borrowing until they get some more assurances over the depth of the water.

That caution comes screaming through in the latest SME Finance Monitor, which surveys 5,000 SME owners on access to finance. Quarterly figures show a record high in loan and overdraft approvals. Yet fewer firms than ever are using external finance, with almost 50% of businesses happy to class themselves as permanent non borrowers. Findings echoed in WM’s own annual 2015 Outlook research, which found 67% of manufacturers looking to sustain growth on cash reserves alone.

That determination to do it yourself doesn’t always pay dividends. You only have to look at the wave of new machinery at our three case studies in this article to see the benefits of bringing in third party financial support. Or glance further afield to Germany where they are trialling a range of industry 4.0 embracing uber factories using £250m government funding to support roll out of new production technology.

We’re going to need to invest in new kit to have any hope of keeping up the productivity pace. It’s concerning then that our own public: private partnerships could soon be culled. The RGF- integral to sparking two of the investment deals described in this article, finds itself under heavy scrutiny as part of this autumn’s government spending review. Brighter news can be found in George Osborne’s commitment to extending annual investment allowances, which offer 100% tax relief on new kit acquisitions up to £200,000.

Schemes like AIA and RGF have been the kindling for reigniting manufacturing investment through the banks. If they’re taken away then all eyes will be on whether this relationship has enough warmth to burn on by itself.

Max Gosney

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