1 Parliamentarians Guidebook to Manufacturing Chapter 1: Finance for SME Manufacturers i. Introduction... 2 ii. Overview: Finance for SME Manufacturers... 2 iii. Public funding mechanisms... 3 iv. Specialist private finance... 4 v. Other sources of funding... 5 vi. Guide to applications... 6 vii. Useful contacts... 7
2 i. Introduction At a meeting of the APMG on the 29 th March, it was suggested that an ongoing project of the group should be a manufacturing Guidebook for MPs. The Guidebook will draw together information from different sources on a range of topics, that will be of use to MPs in working with, or advising, their local manufacturing businesses. This first chapter addresses the issue of finance for manufacturers, and particularly SMEs. As an issue of paramount importance to ensuring that manufacturing thrives at all levels, this formed the subject of the second APMG seminar. Below is a summary of the main points of that discussion, followed by sections on: Public Funding Mechanisms Specialist Private Finance Other Sources of Funding Guide to making applications Useful contacts Further information on giving feedback, contributing, or finding out more is contained at the end of the chapter. ii. Overview: Finance for Manufacturing SMEs, March 2011 During a recent APMG meeting on SME finance, the current mood in the world of SME manufacturers was summed up as a state of puzzled euphoria. Indications leading up to March showed that UK productivity was increasing, and that manufacturing has continued to out-perform other sectors across the economy. Output prices rose for the 16th consecutive month in February to reach their highest rate since August 2008, with the steepest increases in chemicals, food and drink and timber. There was also a ten-fold increase in George Osborne s mentions of manufacturing in the Budget from 2010; recognition (at least in terms of language) from government that manufacturing matters to the UK economy. It was suggested that because SMEs do not fully understand the complex reasons behind their resilience, there is a lack of confidence that it can be maintained. This lack of confidence has been shown not to be without cause, as June began with the slowest growth in the sector since September Moreover, the financing policy measures announced or extended in the Budget add to an already confused landscape for SMEs looking to expand their business and fund operations. There is a need to better advertise banks willingness to lend to manufacturers, and the banks important role in helping SMEs develop credible business plans when applying for finance. Linked to this issue, the APMG has identified a possible culture problem within the sector around reluctance to invest in plant and machinery, which could be much greater. Boosting this kind of investment is an important opportunity for developing the SME manufacturing sector. Sources of information about where and how to find finance are many and varied. Information, particularly about government funded schemes, ought to be accessible and understandable to the users first and foremost (rather than financiers or civil servants). Often it is not. Alongside this first chapter of the APMG Parliamentarians Handbook, the group will continue to look into the important issue of finance for business through further events and activities in the coming year, including monitoring the development of the post-rda landscape for business support. Many thanks to Lombard for their help in compiling this chapter. 2
3 3 iii. Public funding mechanisms The 2011 budget announced a number of changes to existing schemes relating to finance provision. Some changes affect the general regime (such as corporation tax rates and supporting infrastructure) whilst others require direct uptake from SMEs. Parliamentarians are well-placed to disseminate information about these funding mechanisms and encourage SME manufacturers to pursue different financial options to help grow their business. Enterprise Investment Scheme What is it? When do I need it? How do I access it? More information? The EIS is a series a tax reliefs linked to investment in Small and Medium Enterprises If you are securing private investment in your company. Through your tax return, following advice from a qualified accountant. Export Credit Guarantee Scheme What is it? When do I need it? How do I access it? More information? A number of products through which the government provides a partial guarantee on bank loans to enable the purchase of UK goods and services by overseas buyers If you are an exporter of goods or services, and an overseas buyer needs credit, or a guarantee on credit, to purchase your goods or services. Application forms to be completed by both the exporter and buyer are available on the ECGD website R&D Tax Credits What is it? When do I need it? How do I access it? More information? A reduction in an SME s corporation tax burden by 200% of the amount spent on R&D. It can also form a lump sum tax credit. If you are spending on R&D that achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. Through your tax return, following advice from a qualified accountant. tm Enterprise Finance Guarantee What is it? When do I need it? How do I access it? More information? A government guarantee of 75% of a loan. If you have an annual turnover of up to 25 million and do not have the security required for a conventional loan. When applying for a loan through a bank. ink.gov.uk/bdotg/acti on/gsddetail?itemid=
4 4 iv. Specialist private finance Asset finance What is it? A range of specialist finance whereby your asset acts as a guarantee. When do I need it? When investing in new plant and machinery, or growing the business in a manner that requires large scale expansion. An alternative to conventional loans, asset finance makes high-cost assets such as equipment and machinery easier to acquire. Asset finance provides a number of alternative financing options for capital expenditure, whether purchasing office equipment or specialist plant and machinery. Below are some examples of asset finance options available in the marketplace. Hire Purchase Customer ultimately owns the asset This is probably the most common form. It is suited to long life assets that hold their value and that offer good security on a loan over the term. It is a straightforward payment-by-installment product where the customer ultimately owns the asset. Finance Lease Rent rather than buy the asset Finance leasing allows a business to rent the asset rather than buy it. Generally rentals will be calculated over an agreed term, at the end of which the finance company will have recovered its outlay in purchasing the asset on the business behalf. Operating Lease Rentals linked to revenue generated Effective for high value, specialised equipment or for assets needed to support a specific contract. Rentals will be based on the value of the asset over the period required and, as a result, can be linked directly to the revenue generated. Sale and Leaseback Off-balance-sheet cash injection With sale and leaseback, a business can immediately free the capital tied up in their assets, whether in technology or in a vehicle fleet. The business gets cash injected straight into its company's reserves and provides the benefit of being off balance sheet. Contract Hire Complete solution from sourcing to disposal Commonly associated with vehicles, contract hire is a form of lease, based on the operational life of a capital item. It offers a complete solution to the sourcing, finance, management, maintenance and ultimate disposal of an asset. Contract Purchase More flexible than hire purchase Contract purchase offers all the ownership advantages of hire purchase (where an individual or a business pays by installment and ultimately owns the asset) but with added flexibility. A guaranteed value for the asset at the end of the agreement means that regular repayments are reduced.
5 5 Invoice Finance What is it? Financing around a companies invoicing and payment mechanisms. When do I need it? If customers aren t adhering to credit terms, or are imposing lengthy terms that affect cashflow. Even when business is good, cash isn t always in abundant supply. If customers aren t paying promptly, an organisation may lack the cashflow it needs to finance growth activity such as recruiting new staff, relocating, introducing new products and services and investing in marketing. Invoice finance gives access to the money a business is owed. There are a variety of invoice finance options available. Two of these include: Invoice Discounting Invoice discounting is suited to businesses that have well-established systems and procedures in credit control. Invoice discounting is a way to give a business the means to borrow the money that it is owed. Factoring Factoring is primarily for businesses without an established credit control function and who may have customers who don t always pay on time. The finance provider, in effect, becomes the business credit control service. It collects payments from customers, which it pays to the business less a service charge, which is paid once the invoice is settled. v. Other sources of funding Organisation Website Further Details Community Development Finance Association British Business Angels Association (BBAA) Representative body for all the Community Development Finance Institutions in the UK. Networks of high net worth individuals who invest in high growth businesses. European Investment Bank The EU s financing institution, providing long-term finance in support of investment projects. European Investment Fund Indirect support to SMEs through working with intermediaries that provide finance. GRANTfinder A grants and policy database, with more than 6000 funding opportunities listed. BBA Business Growth Fund The British Private Equity & Venture Capital Association Prince s Youth Trust Business Fund Offers funding in return for an equity stake in companies in between the large and SME parameters. Industry body and public policy advocate for the private equity and venture capital industry in the UK. Numerous programmes to help young people in business, including funding through the Enterprise Programme and Community Cash awards.
6 6 vi. Guide to applications The APMG repeatedly hears conflicting reports on banks willingness to lend to manufacturers. Within the context of this debate, it remains important that SMEs are well equipped to make strong applications to banks when applying for any kind of financial product. Here are four important elements of a strong application, which whilst directed specifically at Asset Finance are relevant to most financial applications (taken from Leasing for SMEs, a Leasing Life supplement in Association with Lombard): 1. Research the market Know who provides finance for the assets you are looking to fund, approach a number of them and, if you can, talk to other SMEs about their experience of using asset finance. 2. Approach funders early on While one of the benefits of asset finance is a relatively fast credit decision, companies are more likely to get the funding they require on attractive terms if they have spoken to asset financiers early on about their plans and why they will need the finance. 3. Put together a sound business case While the asset acts as a funder s security, an asset finance provider still needs to understand a company s risk profile. They need to look at a company s credit history and growth plans to ensure repayments can be met. For assets that are more specialised in nature, funders need a clear understanding of how the asset will help the business expand or improve efficiency and increase profits. 4. Talk to funders on a regular basis Businesses have changing finance needs and, while at the outset there may just be one transaction that needs funding, as a company grows or the economic environment changes, there may be other areas that funders can help with. For them to understand what s happening in the company and how they can help, companies need to keep an open dialogue and keep funders up to date with what s happening in the company now and what its plans are.
7 7 vii. Useful contacts Organisation Website Telephone Forum of Private Businesses The Institute of Directors Prince s Scottish Youth Business Trust Federation of Small Businesses Institute of Chartered Accountants in England and Wales Chartered Institute of Management Accountants Assed Based Finance Association Confederation of British Industry British Chambers of Commerce Engineering and Machinery Alliance (EAMA) Finance and Leasing Association Quoted Companies Alliance Businesslink Department for Business Innovation and Skills (BIS) Technology Strategy Board Manufacturing Advisory Service
8 The Guidebook to Manufacturing is designed to compliment the work of Parliamentarians in relation to manufacturing and the productive industries. It is compiled throughout the parliamentary year by the Associate Parliamentary Manufacturing Group and is available in loose-leaf format from the APMG website: The Associate Parliamentary Manufacturing Group, inaugurated in February 2011, exists to encourage the exchange of knowledge and understanding between Parliament and the manufacturing industries, helping to raise the profile of manufacturing both inside and outside of Parliament. The APMG is co-chaired by Conservative MP Chris White and Labour s Barry Sheerman MP. Guided by its Parliamentary officers, the group (consisting of MPs, Peers and Associate Members from industry) provides an open forum for debate between Parliament and the UK s diverse manufacturing industry. The officers hope to raise awareness of the challenges that face the UK s manufacturing industry, to celebrate its successes, and identify actions for improvement. Projects, activities and research bring together Parliamentarians, representatives from the manufacturing and productive industries, as well as academics, civil servants, and policymakers. As an Associate Parliamentary Group, the APMG facilitates discussion in a neutral and trusted environment, where parliamentarians can meet the experts they need to keep up to date with developments in industry. The Group operates according to the rules for All Party Groups as set down by the Parliamentary Commissioner for Standards. To contact the group, or to speak about contributing to the Guidebook to Manufacturing, please The APMG is supported by:
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