Factory floor

Funding options for growth

Michael Jayson, Partner, Audit
03/04/2019
Factory floor
Growing a manufacturing business is not always a simple journey, often there can be significant steps up in terms of volumes and trading rather than it being a smooth curve. The finance journey is similar and the process is ongoing – there may never be a final arrival point.

Every manufacturing business needs to be appropriately financed to support their growth. If you get this wrong it can impact on profitability, restrict growth, or even worse, cause a business to fail.

There is no ‘one size fits all’ answer to funding. You need to consider the structure of your business and the options available. The first step in any decision making process on any significant funding changes will be to produce a business plan. This is likely to be required by both debt and equity funders but it will also help you to, fully think through your business before you start, target your resources to what is needed to exploit competitive advantage and ultimately, make the right decisions about the most appropriate funding for your business.

The funding landscape has changed significantly over recent years. There are lots of options available, some of which have been available for many years and some of which are new.

Funding by tightening internal cashflows

The phrase ‘turnover is vanity, profit is sanity, cash is a reality’ is more true in times of uncertainty than ever before. There are some fairly simple steps available to most manufacturing businesses to help maximise the available cash and minimise the funding requirement. You need to understand and take control of the ins and outs and produce a weekly cashflow forecast – this will help focus the mind. Examples include:

  • reviewing Stock and WIP levels to reduce excess holdings
  • producing sales invoices as early as possible
  • tightening credit control processes
  • review terms with suppliers to see if these can be extended
  • reviewing customer payment methods to shorten the receipt of funds. For example, getting customers to pay via electronic transfer or possibly direct debit to increase both the speed and certainty of receipt.

Debt options

Debt comes in many guises and established manufacturing business will often use a blend of durations and forms in order to match cashflow requirements. The four main types being:

  • overdrafts and revolving credit facilities
  • loans
  • finance secured on assets
  • fixed-income debt securities.

It is not untypical to see a business with a) secured lending over large items of equipment (if they are not held operating under leases in the first place and potentially off Balance Sheet under current UKGAAP); and b) invoice discounting over the debtor book.

Newer forms of finance

We are also now seeing other funding streams such as P2P business loans and supply chain financing/reverse factoring becoming more common.

P2P lending has grown significantly in recent years via internet based platforms and has the advantage of speed and less rigorous challenge/due diligence required around businesses plans. Despite this it should not be entered into without due consideration from the business especially as these often require personal guarantees (PGs).

Supply chain finance or reverse factoring as a form of finance is less common but has a key benefit of allowing suppliers to take advantage of the credit quality of their larger customers. Essentially this is where a supplier receives finance in relation to their receivables (money for goods/services delivered) by a process that is started by the ordering company. It allows the supplying company to receive better finance terms than it would otherwise be able to receive from a lender. Traditional factoring works on the basis that a business receives finance on their receivables. Conversely, reverse factoring (or supply chain financing) is a solution where the buyer assists his suppliers by financing their receivables using a more flexible method and at a lower interest rate than would be offered. As a proportion of the market, reverse factoring is less than 5% of the factoring market but this is growing.

With lots of options available it is well worth considering getting advice on this area, as a small percentage of the funds raised paid in fees can make huge differences to your business in the future.

There have also been various government initiatives over recent years, each designed to get the debt markets working more efficiently. On a national scale these include the previous Enterprise Funding Guarantee programme but also now under the British Business Bank the ENABLE guarantees and funding programmes. Each of these have had a positive effect on opening up funding for relevant lenders/borrowers.

Most of these work by participating banks receiving incentivisations by a government-backed portfolio guarantee to cover a portion of a designated lending portfolio’s net credit losses in excess of an agreed ‘first loss’ threshold, which they receive in exchange for a fee.

ENABLE programmes

The ENABLE Guarantee programme is open to all UK banks and UK branches of foreign banks which lend, or intend to lend, to viable small and medium-sized enterprises operating in the UK. The British Business Bank has committed guarantees for live portfolios of over £800 million under its ENABLE Guarantee programme (as at the end of October 2018).

Similarly, the ENABLE Funding programme is aimed at improving the provision of asset and lease finance to smaller UK businesses. Providers of finance to smaller businesses often lack the scale required to access capital markets – a key source of funding for lending institutions – in a cost-efficient manner. ENABLE Funding aims to warehouse newly-originated finance receivables from different originators – bringing them together into a new structure. The British Business Bank has to date entered into seven transactions under its ENABLE Funding programme and has committed more than £344 million to smaller finance providers.

Since the first transaction in September 2015, the ENABLE Funding programme has supported lending to over 17,000 businesses.

Regional

More locally, business may be able to access to finance via their local Business Growth Hub and potentially the regional investment funds which may well have debt funds available in addition to the equity funds. Unfortunately, the level of support and funding available can still be a bit of a postcode lottery. As a firm with offices across England, Crowe is well versed in the pros and cons of doing business in any one of the 38 regions. We would be happy to discuss how we can help you, please get in touch with Michael Jayson, Partner or your usual contact partner for further information.

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Michael Jayson
Michael Jayson
Partner, Audit
Manchester