Securing credit in a crunch

Finance provider Cattles Invoice Finance has conducted its own research among companies in the packaging sector, and found that 30% said the inability to access capital was limiting their growth.

Doug Crawford, group managing director, says: The continued fall-out of the credit crunch has led to banks applying much stricter lending criteria, especially on unsecured finance such as overdrafts. This can have a serious knock-on effect on the print and packaging industry.

However, despite all this doom and gloom there is still money out there. It is not impossible for packaging firms to acquire finance to buy new kit or to expand into new premises. As many companies are discovering, you just need to work harder to find and win it.

Lack of understanding
Brimur in Cambridgeshire specialises in corrugated packaging. Having acquired three new customers in as many years, it needed to invest in new equipment, and, like many firms, it went to its bank for this finance. Barclays Asset Finance provided Brimur with three lease purchase deals worth £425,000, which allowed the firm to buy two main printing-slotting and folding machines.

Further lease purchase deals followed in 2005, with Barclays Asset Finance providing 90% financing for additional equipment worth £200,000. While David Orr, managing director at Brimur, speaks highly of Barclays and has clearly built an effective relationship with the bank, many in the industry say that banks are too impersonal and have too little understanding of what is involved in running a packaging firm.

Some of the larger banks have print and packaging divisions and argue that this qualifies them as experts in the industry. But John Benner, director of IGF, a commercial finance provider, disagrees. This is the fundamental error of many big banks, he says. When providing credit to an individual business it is not about understanding the industry, it is about understanding the business you are lending to. Rather than go to a major multinational, you’re much better off talking to a small, independent finance provider that will take the time to understand your business.

A popular alternative to overdrafts, loans and lease purchase arrangements from the major banks is invoice finance. The Cattles survey found that 47% of companies in the sector already use it. Invoice finance providers will advance a business up to 90% of an invoice as soon as it is raised, and then on collection of the debt will pay the remainder less a charge of a few per cent. Many firms arrange an invoice finance facility, which they can hold in reserve and use to snap up equipment as and when it becomes available.

In April, Walsall-based Middleton Paper bought a secondhand sheet cutter, which will allow the firm to take on more work converting packaging and graphical board products. Finance director Sean Markham reports that the company is relatively cash-rich so was able to pay for that machine with cash. However, in 2004 it bought a brand-new cutter, which cost around £400,000, and so it used asset finance for that purchase.

Asset finance
Asset finance has grown rapidly in popularity over the past few years. It works like a mortgage, in which the finance provider supplies the funds to buy the equipment, and then the packaging firm buys it from the financier over an extended period. Because the capital is secured against an asset, this type of finance allows firms to leverage much greater amounts of capital than they would with traditional types of finance such as loans or overdrafts.

Whatever form of finance you choose, in today’s economic climate the provider will need to see clear evidence you are a good investment. Chris Buxton, chief executive at the PPMA, comments: The banks cannot cease to lend money. It is their core business, but now more than ever they want reassurance that their investment will produce a good return.

He continues: In a recent meeting with two PPMA directors, they claimed that in direct conversation with bankers they were told that there is ‘plenty of money available’ if you can tick all of the right boxes. This means you need to stay lean and mean, watch overheads, and present lenders with a professional, well-structured business plan.

It is also vital to plan ahead. Gary Edwards, head of the Growth & Acquisition Finance division at Investec Private Bank, says: Sometimes a piecemeal approach can invite lender fatigue and an impression of short-term fixes, so when considering funding requirements start with a blank sheet of paper, review the whole situation and then decide on the underlying business need. Often it may not be as simple as investing in a new machine.

Long-term plan
It is equally important to build a long-term relationship with your finance provider. In May, Crewe-based Medica became the first UK company to install a Bobst AccuBraille machine. The pharmaceutical carton manufacturer spent £450,000 on the machine, which will allow it to comply with European legislation enforcing Braille on all pharmaceutical outer packaging by 2010.

Mark Kerridge, managing director of Benson Group, which owns Medica, says: We’ve funded this and other investments in equipment through traditional hire purchase arrangements. We’ve not found it any more difficult recently, but this is probably because we always plan between 12 and 18 months ahead and so have the necessary finance locked down well in advance.

The secret to getting the finance you need is careful planning. Leave enough headroom in your finances so you can afford the deposits on the equipment, and, more than anything else, work closely with your finance partners. Remember they still want to lend you money, even in a credit crunch. If they know how your business operates, and have worked successfully with you in the past, they’ll be keen to lend you the money you need to finance your future growth.

CASE STUDY: TDX
Thermodynamix Thermoforming Specialist Services (TDX), in Gateshead invested £1.5m in a new production line in February last year, to manufacture plastic film for conversion into food packaging.

As well as boosting the firm’s green credentials, this investment has generated 17 new jobs.

Yorkshire Bank’s Financial Solutions Centre in Newcastle provided £950,000 of asset finance to make the deal possible. It is a straightforward finance lease to be repaid over the mid to long term with a fixed APR.

John Bacon, financial controller, says: We did consider alternative financiers, but chose Yorkshire Bank because we’ve bought other financial products from them, and they allocated us a relationship manager who had in-depth knowledge of their in-house asset finance division. The strength of this relationship during what would inevitably be the teething problems of the start-up period won them the deal.

He says that the experience has been generally very good: We supply Yorkshire Bank with monthly accounts and their relationship manager keeps in close contact with the business for further financing requirements. If I could do it again I’d try to build some slack into the original deal for further plant modifications. We’ve got much better at production efficiencies, but they sometimes require capital additions, and we have to go through the whole lending process every time we do this.

Mark Prinn, sales and marketing director at TDX, offers this advice to other packaging firms looking to secure similar finance deals: It is certainly becoming increasingly difficult to source finance for UK manufacturing businesses. However, niche businesses with a good long-term market outlook should find it no more difficult today than in the past. To ensure your business plan passes the test, you should seek advice from specialist advisors at the early planning stage.

A TO Z OF FINANCE JARGON
• Amortise to pay off a debt in instalments, such as a mortgage or loan; writing down the cost of an asset over time
• Base rate the interest rate set by the Bank of England
• Capital growth increase in the value of an investment
• Company voluntary arrangement an arrangement where a company agrees terms with its creditors for the settlement of its debts as an alternative to bankruptcy
• Dividend cover the number of times that a company could pay its annual dividend from its earnings
• Escrow cash or securities put into the custody of a third party for delivery only after the fulfilment of the conditions specified in a finance agreement
• Factoring selling debts in return for cash
• Hedge protection against financial loss
• Maturity date the date the final payment of a loan is due
• Payment-protection insurance cover for loan repayments
• Secured loan a type of loan where an asset is used to guarantee repayment

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