Summary
¦ More timber companies are exploring broker-arranged finance.
¦ Larger businesses are also approaching brokers, rather than going direct to banks.
¦ The W10 wood technology show generated a lot of machine financing enquiries.
¦ More alternative funding options are becoming available as the market recovers.
It’s been an interesting year economically, but it’s been a good year in general for finance brokers. And in the last few months, as finance brokers in the woodworking sector, we’ve seen a lot more business from customers who would previously have been deemed “untouchable” to a broker due to their size and direct relationships with lenders.
One such example is a large customer with a good business who, in the past, has always said “don’t worry we’ll sort out our finance with our bank”. However, recently they decided to purchase a new piece of equipment costing over £150k. Usually that would not have been an issue, but on this occasion the bank refused, even if they increased their deposit. This left them in an awkward position, as they had to come back to us for help! It would have been easy to say “I told you so”, as recently this has been happening to all sorts of businesses of all sizes, not just in the woodworking industry. But that would not have helped secure the deal or this company’s potential custom in the future. The end result was that we managed to place the business and the customer was very happy.
The sort of problem this company had raising credit might indicate that the market generally is still under stress, making traditional lenders reluctant to lend. But other evidence suggests the picture is not so simple. For instance, more positively, smaller finance deals – facilities of less than £50k – are starting to come back to the market. I think this indicates an increase in confidence in the market.
Another positive pointer was the W10 wood technology show which, from our perspective, was a success, especially compared to 2008. Following the exhibition, we have a good number of deals to process going into 2011, whereas going into 2009 the picture was looking decidedly bleak.
There are also rumours that other financing options have become more readily available. This bears out my discussions with a major direct lender, which highlighted that at least some of the main lenders are still “ignoring” sales opportunities, especially in the manufacturing and processing sectors, to beef up their own capital positions. Whilst they do want “new” customers, they are much keener on those with a very good cash base or what is termed a “strong security covenant” via property.
Some banks are not offering asset finance to businesses below a certain level of turnover (generally companies with sales of £1-20m). Others’ relationship managers are trying to arrange asset finance against property remortgage and secured loans. But this may not be the right solution for the customer and can cut off potential lines of credit for future needs.
The best advice in the current climate is still to spread your risk via different lenders. Don’t put all your eggs in one basket, (either with lending or deposits). Companies should also use “horses for courses”. For instance asset finance, rather than an overdraft, fixed term loan or second mortgage, should be used for financing manufacturing assets and vehicles.
Hire purchase remains the most popular form of financing, where customers put down a deposit and VAT and then pay for the equipment over a set period, owning it at the end of the agreement. There is also the option to lease equipment, which means no deposit, VAT paid monthly and passing title to a third party at the end of the agreement.
Operating lease, which is similar to lease, but off balance sheet lending, with the residual value for the equipment set at the end of the agreement, had almost disappeared in 2009 and through 2010. But recently we have seen a couple of lenders starting to show an interest again, which can only be good news.
Ending on a positive, from our perspective 2011 is looking good for the industry and we’re getting orders and enquiries from businesses of all types, from sole traders to plcs. This indicates not just a more positive mood in the market, but also that customers are realising that they are not tied to one lender and have financing choices. Long may it continue!
