Time to invest: How to find your finance

With the cost of imported equipment now at bargain basement prices, compared to five years ago, banks and non-banks are now keen to lend manufacturers the capital needed for that new machining centre or for that new production line companies may have been planning to install.

While Australian manufacturers are facing some real challenges, Grant Cairns, General Manager Banking Specialist with CBA, says most companies are adapting to changing market conditions.

“The high Australian dollar is a major challenge for Australian manufacturers, but equally we are seeing a number of Australian manufacturers reorientating their business to take advantage of the strong dollar to reinvest in equipment and gear up,” he told Manufacturers’ Monthly.

However Cairns explains that which sector of the manufacturing industry a company operates in is important when attempting to raise funds.

“Obviously there are manufacturers in sectors that are geared to growth, but unfortunately there are others in sectors facing structural decline.

“Australian manufacturing has many unique niches, with many enjoying the opportunity to get access to finance. “In fact, we have seen growth in the amount of money we are lending to the manufacturing sector over the past year,” Cairns said.

“However,whether it’s a $1m or $100m loan, it’s critical for us to understand our clients business, therefore it’s important for manufacturers to have a robust and strong dialogue with their banks around how their business is travelling; what the business is looking to do to capitalise on opportunities or to manage risk, and what productivity improvements they are putting in place etc.

“My advice is for manufacturers to have a good open dialogue with their banks, and to explore all finance alternatives.

“We try to work closely with our clients to really understand their business better so we can make informative decisions based on a business by business proposition not at an industry level.

“For example, we need to know the type of equipment they are buying, whether they are sourcing it from overseas or locally, what it will be used for, and the average life for that plant. We go through that diagnostic first before we jump to what type of solution,” Cairns said.

“In many respects, the type of solution will be different, depending on the security of the asset. We would need to know for example, if it’s an asset that we can easily sell on the market or if it is a specialised and bespoke piece of equipment to that particular business. That would influence whether it would be an asset finance solution or a commercial loan for example.

“Obviously there is more due diligence on a loan of $100m than $1m, but it depends on the size of the business as well.

“A $100m loan to a very large manufacturer maybe not that significant, but $1m to a smaller manufacturer maybe. Loans are very specific to the clients needs.”

He also said interest rates can vary considerably between clients.

“It all depends on the business itself and on the level of security that we are offered. It also depends on the type of utility; overdrafts for example are very different to a loan that is secured by a commercial property,” he said.

When it comes to types of loans, Cairns says the CBA is seeing strong growth in equipment loans using chattel mortgages.

“It’s mainly for tax reasons, for GST claiming, but it all depends on the particular circumstances of the business, and their tax circumstances in particular. The landscape changed last year with the introduction of the GST on hire purchase, so it’s important companies look at the most important instrument to use when structuring the financing,” he said.

Last year also saw the introduction of the PPSR (Personal Property Securities Register), which according to Cairns has been a fantastic thing for the assets finance industry.

“Now we have one national register, rather than multiple state registers, plus it is broader with users able to register intangible and tangible assets that they have incumbrance over.

“However manufacturers should be aware of changes, especially the invoicing of the goods they ship to their customers.

“Previously they were protected by the retention of title on the invoices with payment terms, but that has been replaced by the PPSR.

“It’s important for manufacturers to understand how the PPSR legislation impacts them in terms of adding protection for them to make sure that when their customers default what rights they have to those goods,” Cairns said.

Finance options for SMEs

One recent new tool aimed at SMEs looking for finance is Finnovate’s equipment finance comparison website.

Launched in 2012, it is a free service to business with direct access to nine different lenders.

It is an online Business Finance tool which allows businesses to compare rates and costs and apply directly to the selected institution for finance.

According to Chris Beath CEO of Finnovate, the site is impartial as it does not advise or recommend to business which lender to select.

“It simply presents all the relevant information allowing an informed decision to be made and covers most variables,” Beath says.

“At it’s core is plant and equipment leasing and chattle mortgage, with chattle mortgage option overwhelmingly the most popular product in Australia at the moment, with most terms ranging from one to five years.

“If any variable is outside these then the financiers are introduced to the prospective customer and they can discuss the details and the options such as restructuring the repayments or the GST going back in, which is a common option.

“While chattle mortgage is the most popular, for tax reasons many companies choose to use leasing, hire purchase or rental options.”

Beath says the rental option is popular with technology based assets where the customer might not need or want to own rented equipment at the end of the leasing term, especially in the IT field.

“They prefer to rent that equipment for two to three years and when new models come out, they can return the goods and go on to rent the next new model,” he explained to Manufacturers’ Monthly.

According to Beath, equipment finance has grown consistently over the past four years, despite what many economists are reporting.

“It has grown year on year and month on month, and now a recent report on capital equipment expenditure is forecasting a considerable rise into 2013/2014. “While most of that growth is around the mining industry, figures for the manufacturing industry are showing marginal increases,” Beath told Manufacturers’ Monthly.

“For the top end of town there are a number of different options. Once the client gets over the $1m mark, that’s when we would walk them through the options.

“It’s still a chattle mortgage product, but they would need a little more analysis into it, depending on the amount of money being invested,” Beath said.

Another popular option for manufacturers is debtor finance.

“It’s a great tool, and in recent years has been one of the fastest growing products in the business finance space and can be an exceptional tool for manufacturers looking for growth if they don’t have the working capital available.

Beath’s advice for manufacturers is shop around and to talk to a broker to make sure they are getting the best deal with debtor finance.

“It depends on what industry they are in, what spread of clients they have and the purpose of the funding,” he added.


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