Demystifying Asset Finance for the Engineering and Manufacturing sectors

Ian Barker

Ian Barker is the Managing Director of the Manufacturing division. Here he gives us his take on Asset Finance for the Manufacturing and Engineering sectors. 

"I’ve been working in asset finance for so long now that I take it for granted that everyone knows what it is; yet, in our quarterly survey of 1,000 UK SMEs – which we call our ‘business barometer’ – the percentage of ‘yes’ responses to the question ‘have you heard of asset finance’, has remained stubbornly at around 40% - since 2013!" 

What is asset finance? 

Asset Finance is an alternative form of funding used by businesses to obtain the equipment they need to grow. 

Common examples of asset finance products are: 

  • Hire Purchase (HP): allows the customer to buy the equipment on credit. The finance company purchases the asset on behalf of the customer and owns the asset until the final instalment is paid, at which point the customer is given the option to buy it
  • Refinancing (Capital Release): The finance company purchases the asset and finances it back to you. Repayments are calculated in line with the income stream that will be generated by the asset; at the end of the refinance term, you own the asset
  • Finance lease: The full value of the equipment is repaid to the finance company, plus interest, over the lease period. At the end of the term, the company can choose to:
    • continue to use the asset by entering a secondary rental period
    • sell the asset and keep a portion of the income from the sale
    • return it 
  • Operating lease: Similar to a Finance Lease, an Operating Lease allows you to rent the asset from us while you need it. The key difference between the two is that an Operating Lease is only for part of the asset’s useful life. This means you pay a reduced rental because the cost is based on the difference between the asset’s original purchase price and its residual value at the end of the agreement.

Types of assets financed

The beauty of asset finance is its flexibility – it can be used to fund any asset, including all types of CNC machines from borers to lathes, milling machines, press brakes, lasers and so on. There is very little that we won’t consider financing.  

Other Engineering assets we fund include:

  • Turning centres 
  • Vertical borers
  • CMM machines 
  • 3D printers 
  • Fabrication equipment 

We can even help with the refurbishment of assets, for example, where we pay the refit costs by taking security of an asset to aid cashflow, via Sale & HP Back.

It makes the otherwise unaffordable affordable because it gives businesses access to the equipment they need without incurring the cash flow disadvantage of an outright purchase. 

Agreements can also be customised to the business’s needs, with flexibility on both the term and repayment schedule.

Why Close Brothers Asset Finance? 

We are the largest, most successful and longest-established specialist asset finance funder in the UK with over 30 years’ experience working with SMEs through all economic cycles – the fact is, there’s very little we haven’t seen or experienced. 

Our team of engineering finance specialists – many of who have an engineering background themselves - work with businesses across the UK to provide funding for both new and used engineering equipment. As sector experts, they understand how vital it is that you have the right equipment, so whether you are looking to expand your range of equipment or replace it, we can help.

What’s the outlook like for the sector? 

An essential part of the UK economy, the engineering sector employs more than five million people and contributes £1.06 trillion in turnover. Now, as always, engineering plays a central role in ensuring sustainable economic growth.

The outlook for the sector is positive. The European engineering industry has been set the ambitious goal of increasing output to more than 20% of the GDP by 2020. There are many UK firms with the capability and determination to rise to this challenge, but generating this growth will require investment. Worn out or obsolete assets will need to be replaced with those that improve productivity and cost effectiveness.

Case study

Company:

Newfield Fabrications Company Limited was a family-run business that had been trading since 1965, working across a number of engineering industries and specialising in producing high quality mild steel fabrications with a range of finishes 

The challenge: 

The owner was looking to retire and sell the business to a management buy-in team.

Solution: 

For Close Brothers Asset Finance, this was an opportunity to help an experienced group of professionals looking to acquire a well-regarded business with a strong track record of profitability. As part of the deal, the existing Managing Director would remain in situ to ensure the smooth running of operations.

Close Brothers Asset Finance provided a Sale and HP Back product against the company’s machinery over five years; alongside this facility, Close Brothers Invoice Finance provided a new Invoice Discounting facility with a Cash Flow Loan of £300k to be amortised over a three year period. 

The outcome:

The agreed finance package facilitated a smooth handover to the new owners with the added benefit of knowledge retention and succession planning to ensure the continued long-term success of the business.

Finance products explained

Sale and HP Back is a form of Refinance that can be used against most types of equipment, making it suitable for companies of all sizes, including sole traders. It works by the funder (us) purchasing the asset and financing it back to you. Repayments are calculated in line with the income stream that will be generated by the asset and at the end of the refinance term, you own the asset.

Invoice Discounting is an alternative solution to traditional types of business finance, which provides instant access to cash tied up in outstanding invoices. The facility adapts with a business as it changes and grows, making it much more flexible than an overdraft or loan.  

To find out how we can help, please contact us today.