PUBLIC FINANCE
How does it work?
In response to the recession, the government created a plethora of schemes aimed at aiding business, particularly small and medium-sized enterprises to stay solvent and grow. Overall, the UK government currently has 631 approved funding schemes from grants and loans, through to financial advice and equity products.
The main schemes currently of interest to manufacturers include the Annual Investment Allowance. This scheme has been extended to 2015 and allows businesses to invest in new plant and machinery, offering 100 per cent tax relief on qualifying expenditure in the year the purchase is made. Initially cut to £25,000 by the government, a manufacturing business can now qualify for tax relief on new purchases of up to £500,000 in one year.
Manufacturers can also make use of the British Business Bank, which assists companies with a turnover of up to £25 million, as well as Local Enterprise Partnerships.
The partnerships are between local authorities and businesses. They decide what the priorities should be for investment in roads, buildings and facilities in the area.
These were given the chance to apply to government to set up an enterprise zone, and can take advantage of tax incentives and simplified local planning regulations. Since 2012, 39 local enterprise partnerships have been created.
Entities such as Enterprise Ventures, which manage these funds, have access to both public and private money. This means shortfalls in public funding due to restrictions can be supplemented from the private sector.
Best suited for
Small to medium-sized businesses.
Considerations
Most government schemes have restrictions on things such as time and funding levels. For example, the JEREMIE (Joint European Resources for Micro to medium Enterprises) funds, which come from the European Union, state that unless the company is located in an assisted area, only those employing fewer than 50 staff members are eligible. This means businesses may need to seek other forms of finance to achieve growth targets.
ALTERNATIVE FINANCE
How does it work?
Alternative finance encompasses products such as peer-to-peer lending, supply chain finance and bridging loans.
Perhaps the fastest-growing form of alternative finance available to manufacturers is peer-to-peer lending, whereby money is lent by pools of lenders via an online platform instead of through a financial institution such as a bank.
Peer-to-peer lenders, otherwise known as crowdfunding platforms, can deliver funds within 14 days if the borrower’s business information is provided in a timely fashion. Much of the application process is handled online and offers the potential for a business to reach thousands of investors. Typical loan rates run from £10 to up to £100,000 at fees of around 7 per cent.
For UK manufacturers reliant on international suppliers or global supply chains, online platforms have begun to emerge offering cross-border pre-approved revolving credit facilities which allow purchasers to pay suppliers a bulk sum or full amount of a transaction’s value at a pre-determined point in the supply chain, with buyers typically being offered 120-day terms to repay the lender.
Short-term or bridging loans can also be considered as a way for manufacturers to grasp time-sensitive opportunities and deal with unexpected cash-flow issues. According to Chris Baguley, managing director of Bridging Finance, manufacturers can typically borrow anything from £20,000 to £5 million, which is often secured against commercial, semi-commercial or residential property. These funds can be used to raise capital, pay unexpected bills, update or repair equipment, or to finance acquisitions.
Best suited for
Smaller firms or startups with solid financial forecasts, manufacturers trading across borders and/or in need of short-term funding, businesses deemed too risky by banks.
Considerations
Depending on the type of funding, finance can often only be granted on a project-by-project basis. Businesses should also be wary of the type of security needed to secure finance.
ASSET-BASED FINANCE
How does it work?
Often referred to as asset-based lending, this form of finance takes on two forms: factoring or invoice discounting.
Both operate on the same concept, using the outstanding invoices of a firm as security against an upfront loan of typically up to 90 per cent of the value of the invoice. The product is designed both as an aid to growth and an alternative to overdrafts.
With factoring, which is designed as a solution for smaller businesses, the lender then assumes control of recovering the outstanding debts owed on the invoice. With invoice discounting, the same loan principle applies, but the borrowing firm retains control of its credit management.
“Often the specific requirement of a manufacturer for cash can be extremely varied from acquiring the stock and raw material required to deliver an order, to hiring the right personnel to undertake it, or even perhaps buying newer and more efficient machinery to optimise the opportunity,” says Louise Beaumont, head of public affairs at GLI Finance.
“As such these orders often place a high demand on cash and working capital for manufacturing companies, with speed of access to finance often cited as the crucial factor in securing the deal.”
Paula Laird, partner at Squire Sanders, says this form of finance is increasingly being used for complex transactions, including syndicated, cross-border and financial sponsor-backed acquisition finance, as well as being used as a working capital facility alongside other finance products such as a high-yield bond.
Best suited for
Companies seeking an alternative to overdrafts and/or companies with cash-flow issues.
Considerations
Using this product means handing over control of a firm’s sales ledger, which is much riskier for the borrower than the lender. An asset-based lender often becomes a priority creditor in the event of insolvency.
