Today, banks are not the only option for manufacturers when it comes to raising finance. Alan Johnson reports.
ASAN Australian manufacturer you will no doubt recognise this scenario: you are an SME and you have just negotiated a long-term, multi-million-dollar contract to manufacture thousands of widgets a month for the next five years, at a very good rate (for you).
The only problem is, you don’t have all the necessary equipment and will need a special piece of machinery costing, say, $1.3m.
So it’s off to your friendly (see TV ads) bank manager, only to be offered a loan at some exorbitant rate which requires you to put your house, car and all your possessions up as guarantee.
Well today, there are a number of other options worth exploring that are not connected to a bank.
Though leasing has been around for decades, with most companies leasing their cars and trucks, some manufacturers may not be aware that they can benefit from financing their equipment needs through leasing, and not just the financing of large-scale production equipment.
Nick Aronson, GM at The Leasing Centre, explains that the outright purchase of equipment can be problematic.
"Not only does it involve a large outlay of funds, it also equates to paying for the future use and benefits of the machinery. Plus the upfront purchase of equipment through cash or a bank facility is not tax effective and restricts businesses from updating or changing equipment as new innovations hit the market," he said.
"Having a flexible finance facility option (leasing) in place for equipment has many advantages. Firstly, it allows businesses to spread payments over the useful life of the equipment.
"This is a bonus when managing cash flow and leaves the business with capital to invest into other areas. Additionally, finance facilities are often tax friendly with monthly payments 100% tax deductable if used for business purposes – making them a cost efficient way to finance new equipment.
"Just as important is what happens when the machinery comes to the end of its useful life. Manufacturing organisations need the flexibility to upgrade or replace equipment at any time, ensuring that they are not left with an out dated machine.
"This way, they can invest for growth – ensuring that they have the option to access market leading equipment that will enable them to develop and grow their businesses."
Daniel Moses, director with the Leasing Centre, advises manufacturers to work closely with their accountant and take their advice, rather than the banks’.
"When it comes to putting in place a flexible finance facility, manufacturing businesses should look to work with organisations like ourselves, who specialise in financing manufacturing equipment," Moses told Manufacturers’ Monthly.
"Unlike banking institutions, these organisations are able to offer specific tailored solutions designed to secure the machinery and equipment required for growth, while making it tax effective, cash flow friendly and flexible.
"We believe every equipment finance strategy should be specifically designed to help bridge the gap between growth objectives and budget limitations, to ensure that organisations in the manufacturing sector get the best investment for their business. Companies like ourselves can add a lot of value; often we know better ways of financing equipment.
"Firstly, we don’t charge for advice or for structuring. Plus from a tax perspective, if we structure it in the correct way, we can reduce the costs. A lot of it is understanding the after tax costs. You might spend $100 on a one type of equipment finance contract and get no tax reduction, but if you spend $120 you might only cost $70 after tax. That’s a very crude example of what we can do."
Moses says forward financial planning is also very important.
"We like to work with our customers and understanding what their next 12 months requirements will be. Then we can put a master facility in place with an approval limit of $x, which doesn’t cost anything to put in place and no obligation to use it. It just means they can start planning to secure the contracts or do their capital acquisition planning and know there is finance behind them," Moses said.
Factoring and discounting
While not quite as well known as leasing, factoring and discounting (receivable financing) is steadily growing in popularity for Australian manufacturers.
According to Tony Della Maddalena, IFD’s chairman, the industry’s turnover is around $60bn with his member companies assisting over 5,000 companies, 20% being manufacturers.
"Maybe 30 years ago, factoring was regarded as a last resort option, but today we are following US trends where it has become more mainstream. Business owners who want to improve and secure their business finances, but who don’t want to give up their real estate security, they would prefer to have it secured by their own business assets," he said.
"Australia is following the US and European trends where factoring is a more mainstream finance tool."
Della Maddalena explained that factoring and discounting involve the assignment of debts by a business (the assignor of the debts, usually referred to as the client) for consideration, generally on a continuing basis.
"There are various ways the purchase transactions are structured. For example, the debt can be sold to the factor/discounter for a price that is less than the face value of the debt," he said.
"In this case the factor/discounter pays the business up to 90% of the invoice value in cash and the balance, less fees, is paid to the business after a set period, or after the debt has been collected.
"Sometimes the debt is purchased for its full face value and then a prepayment of the amount owed is made based upon an agreed prepayment rate.
"Under both facilities, the client sells the unpaid invoices for immediate access to cash, but under the factoring arrangement the factor additionally manages the client’s sales ledger and collection of accounts.
"Therefore, under a factoring arrangement the debtor makes payments to the factor. Under discounting, the debtor nominally makes payments to the supplier; but as the debt is owned by the discounter, the supplier is collecting these debts on behalf of the discounter."
Della Maddalena says it’s probably the bigger players using discounting, with the smaller companies using factoring.
"They might be given a contract from a larger company. Maybe the company is a small food manufacturer who wins a contract to supply product to a whole load of stores such as Coles, IGA or Woollies for example, Della Maddalena told Manufacturers’ Monthly.
"They can’t fund it themselves, so they go a receivable finance company that basically funds those invoices which some big debtors of theirs won’t pay them until 60-65 days.
"According to the latest Dun & Bradstreet figures, average payment days are now about 54 days. Now if you are a small manufacturer turning over $300,000 to $400,000 that’s a ledger of $500,000."
Della Maddalena admits most companies go to their banks first, "But the banks simply look at the company’s asset pool and assess the directors, then demand a mortgage over the directors’ homes. A receivable financing company is a better option."
If you’re an Australian exporter and having difficulty obtaining finance or insurance your first step should be to contact the Australian Government’s export credit agency, Export Finance and Insurance Corporation (EFIC). EFIC provides finance and insurance to help Australian exporters overcome the financial barriers they face when growing their business overseas.
Just recently, EFIC provided a performance bond to support the participation of Australian company Bothar Boring & Tunnelling in a $8.2m subcontract to provide tunnelling services in Kuwait. The main contractor, Kuwait company Process Plant Construction & Contracting KSC (KCPC), required Bothar to provide a performance bond in the form of a demand guarantee.
To facilitate Bothar’s participation in this contract, EFIC provided a $900,000, 36-month performance bond.
Mark Dart, MD of Bothar said without EFIC’s support, the full cash collateral the company needed to secure the bond would have meant diverting working capital from other opportunities and therefore potentially hindering the company’s ability to further develop opportunities.
"The performance bond has enabled us to participate in this major contract and keep growing our business," Dart said.
In another example, Sydney-based Park Assist, a global leader in parking guidance, bay sensing and parking enforcement, secured a US$780,000 contract with the City of Seattle to provide an electronic parking guidance system for the city’s downtown parking lots.
Under the contract, the company needed to lodge a performance bond worth 100% of the contract value, with scope for the bond value to increase by 25% in line with possible increases in the contract value.
In this example, EFIC underwrote the performance bond to help Park Assist fulfil its contract – the company’s first with a US government authority.
Daniel Cohen, Park Assist’s MD, said: "EFIC’s support with the US surety bond freed up a significant amount of our working capital, helping us to fund our strong export growth."
The Leasing Centre 02 9744 7099, www.theleasingcentre.com.au
IFD 02 9233 8205, www.factorsanddiscounters.com
EFIC 1800 093 724, www.efic.gov.au