Aversion to debt
Published: 08 December, 2015
Changes in attitudes towards energy production are having an impact to the offshore sector, but Robert Keep*, Principal at Norton Folgate, the leasing and financing specialists, believes a bigger issue facing the sector is an aversion to borrowing funds needed to develop and grow their businesses and he therefore suggests alternatives to bank overdraft funding. ODEE spoke to Robert Keep.
British engineering is vital to the long term sustainability of our economic recovery, but over the past few years the sector has been hit by a series of financial setbacks. Many organisations have had to tighten their belts and implemented pay freezes or even job cuts. Many have also cut back on all but essential purchases, reduced the frequency of scheduled maintenance and extended the operational life of vital pieces of plant and equipment. Investment in future technologies is also vital, 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 businesses 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, “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 changes in technology or 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 engineering businesses wanting to access funds but recent events have seen little new finance flowing into the 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 Managers have 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%.
“Engineering 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,” stated Robert Keep. “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. What’s more for many operating in the offshore engineering sector the average cost of many ‘capital’ purchases will be considerably higher than for other types of business and extended lead times may apply in order to source them. Specialist knowledge is therefore needed to understand the risks and also the potential timescales and long term returns involved. 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. Crowd funding for some business sectors is proving popular, but enticing a myriad of typically small investors is not the easiest route to take to attract and secure the money needed, particularly given the average value of acquisitions in the offshore and engineering sectors. 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. Also with the industry as a whole feeling the pinch, this may not be an appropriate route to go.
“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 to 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 many businesses are generally feeling more optimistic about their prospects; but 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 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.
For more information please visit: visit www.nortonfolgate.co.uk
