Never has there been a better time to invest in people, training and capital equipment is the prevailing message, so that, when that resurgence really starts to gather momentum, businesses will be ready and galvanised. Yet there is one 'brick wall' that manufacturers of metalcutting and forming machine tools, for instance, are constantly hitting as they seek to follow that path, particularly when it comes to the financing of new and second-hand equipment to streamline their operations – and that is the banks. They have either sealed off their vaults to them or are demanding a raft of charges and crippling rates of interest before they will even consider stumping up the money for such vital investment. Others are insisting on personal guarantees as preconditions for lending. All in all, as far as many manufacturers are concerned, bank finance has turned into a dried up well. The Manufacturing Technologies Association (MTA) is well aware of how tough things are. With the government urging industry to avail itself of the credit to which, it says, it is entitled – via the Enterprise Finance Guarantee (EFG) scheme, for example – the MTA has been striving to help its members to do exactly that. MTA points to how the major British banks were urged by the government to start lending to businesses to drive the growth that the economy so badly needs. This applies to finance for capital investment and working capital – the lifeblood of any company. But, says the MTA, "while banks that ran short of credit were bailed out by the government, there has been much less help forthcoming for SMEs". What has gone wrong? According to the MTA's director general, Graham Dewhurst, the banks, at branch level, no longer have the autonomy they once had to make those investment decisions. "There is a layer that has now been inserted – between the branches and the banks' investment panels – that has moved the decision-making process away from those with a deeper understanding of the customer and the business in which they operate. The personal relationship has been weakened. Now, when our members approach them for finance, the panels – which operate at a more remote level from them – tend to equate 'manufacturing' with 'automotive' - and put a big red 'X' next to the application." TARRED WITH THE SAME BRUSH Companies working in the metal-cutting and forming machine tools sector, and related technologies, are being tarred with this same brush, he adds. "The banks that were criticised so heavily by everyone for being imprudent are now being ultra-cautious and making their terms of lending almost impossible for businesses. While the bank base rate continues to hold at 0.5 per cent, the true cost of money in the market is more like 6.0-6.5 per cent. Part of that is down to the banks imposing a much higher price on risk. The pendulum has swung too far the other way." However, there are alternative sources of funding for cash-strapped SMEs looking to invest in capital equipment. Associate MTA member Close Asset Finance manufacturing division was formed specifically to provide specialist solutions to meet such requirements. It finances new and used manufacturing equipment of all types, tailoring schemes to fit individual requirements. For example, it can refinance existing machinery, allowing businesses to make their assets work harder and use this to raise additional cash for working capital. "A lot of customers' first port of call tends to be the banks," states managing director Steve Gee. "But, given the way the financial services markets has been operating in the last 18 months – and the sometimes negative perception around manufacturing – raising finance for metalcutting/forming machines has not been near the top of the banks' agendas. Their terms have become stringent, with directors' guarantees and charges on personal property often required. "We take the view that, if a manufacturer is investing, say, £75,000 in new machine tools, they are not doing so for the hell of it; they can see an opportunity. We, as a business, are interested in the whys and wherefores behind that: how well and quickly the machinery is likely to generate money to repay us and the acumen of the directors. We are going to want to look around the premises and get a feel for what is happening. We look to build an empathy with the client that develops into a relationship over time." A BREAK WITH TRADITION One alternative to more traditional funding lines is to use the equity that is tied up in machine tools. "That way," adds Mr Gee, "businesses can fund a deposit on a new machine, raise valuable working capital, restructure existing finance arrangements and even 'pay off' the bank/invoice discounting company." Securing the funds, he adds, is quick and easy to arrange, and assets revert back to the company at the end of the finance period. CNC Finance UK – also an MTA associate member – is another company that has access to the latest financial products when it comes to machine tool acquisition. "Unlike traditional finance companies, we are not tied to any one lender and we have managed to maintain a portfolio of lenders who have an appetite for machine tool business," says director James Clist. "We work closely with the industry, assisting our supplier partners to provide funding for machine tool investment. We have built credibility with these lenders over a long period of time, so that, when a proposal arrives from us, the underwriter will generally have a good understanding of the application, recognise the equipment they are being asked to finance, why it is being bought, what their risk is and what happens in the event of there being a problem." More than ever, a prospective lender will need to be made to feel comfortable with a lending application, especially when it may be against the backdrop of impaired trading performance. In the sub-contract sector, hire purchase has been the most popular product for a long period of time, he says, but there has been an increase in requests for operating lease facilities in recent months, as larger companies are finding the acquisition of a new machine tool easier to justify on this basis. "A lot of time has been spent this year, looking after companies who have lost significant volumes of work, with their income seriously affected, and they have often not had the ability to extend their funding lines from their existing banking relationship. We have been able to consolidate existing finance agreements, extending the term and thus reducing the monthly cash burden. We have also been able to raise cash for businesses from the equity in machine tools, which are either owned unencumbered or with an element of finance outstanding. This method of utilising the company's assets to work for the business, rather than a charge over the family home, has been viewed in a more favourable light." There are other companies out there that offer similar sources of financing, so the best advice is to make contact and find out which ones are most appropriate to your needs – and what they can offer and on what terms. Back to the MTA's Graham Dewhurst, who recently addressed the reluctance of the banks to provide similar financing with Peter Ibbetson, chairman of business banking, RBS (Royal Bank of Scotland). RBS, it will be recalled, had to be rescued by the government in November 2008 and a 70 per cent stake is now held in RBS by UK taxpayers. FACE TO FACE At an MTA 'Face to Face With Finance' seminar session, Mr Ibbetson was asked to explain why the banks were acting this way. "He assured the companies in attendance that the banks are listening and working hard to make sure finance is made available to engineering-based manufacturing," recalls Mr Dewhurst. "RBS has also told us that the money is there, but not the demand, whereas we know there certainly is a demand from members. Most of all, this is not just about what is happening now. We need to know the banks will be there in 6-9 months' time, if and when there is a real upturn, to help fund capital equipment and working capital." While recent data suggests that the overall availability of lending is beginning to improve slowly, it is clear that the steep interest rates banks are imposing, the range of hard-hitting charges and the demands for additional security are combining to create a significant cost barrier. No wonder many businesses, many long-term customers of the banking sector, feel betrayed and abandoned, and are looking elsewhere. It is debatable whether the banks can ever win them back when the good times start to roll once more. But they will want customers for their service at some point, because that's the business they're in. And with pent-up demand for finance, maybe it will be the customers that call the shots. It's a nice thought. Box item 1 Enterprise finance guarantee Under the Enterprise Finance Guarantee, the Government will guarantee lending to viable businesses to ensure that they can get the working capital and investment that they need. This £1.3 billion scheme will support bank lending, of 3 months to 10 year maturity, to UK businesses with a turnover of up to £25 million who are currently not easily able to access the finance they need. It will enable them to secure loans of between £1,000 and £1 million through the Government guarantee and is available up to 31 March 2010. The guarantee can be used to support new loans, to refinance existing loans where the loan is at risk due to deteriorating quality of security and also to allow lenders to restructure a borrower's debt where appropriate,or to convert an existing overdraft into a loan to release capacity to meet working capital requirements. The Enterprise Finance Guarantee is available now through 27 lenders, it is said. Box item 2 Offers you really can't refuse ? Haas Automation has been running ex-demo machine sales and is also offering a £2,000 machine tool scrappage allowance plus attractive pricing. ? XYZ Machine Tools also recently offered ex-demo machines at reduced prices at three events – Blackburn, 9-10 September; Nuneaton, 23-24 September; and Waltham Abbey, 7-8 October. XYZ also backed its effort with flexible finance schemes and guaranteed buy-back prices. ? Wenzel UK is offering its full range of metrology equipment on a monthly rental basis, but is also making a 'cash for clunkers' offer – £3,500 trade-in against a new CMM or gear tester. ? Carl Zeiss' UK Metrology Division has launched an innovative 'Pay-As-You-Go' scheme for its CMMs. Customers can use a machine for one year, paying only for the hours of use, subject to an agreed minimum usage. At the end of the one-year contract, customers are able to either buy the machine with a rebate for the rental amount already paid, or can return it subject to nominal cost of de-installation and shipment. ? CMM specialist Aberlink is offering its machines on flexible leasing scheme that gives customers the option of purchasing the leased product outright at any point, with the value of the monthly payments made – up to a maximum value of 80 per cent of the original price –, counting towards the purchase. This means that the company's range of CMMs can now be leased for as little as £357/month. ? Ward Hi-Tech is offering its 'Confidence Package', a scheme that allows buyers to install a Dah Lih machining centre or a Hwacheon CNC lathe, with an option to return after a minimum of 12 months. ? 600 Group will be unveiling a series of finance offerings for customers in the UK, including 0 per cent finance deals, a new 'scrappage' scheme, extended warranty and machine rental offers at a forthcoming Open House. First published in Machinery, October 2009