Economic downturn causes companies to refuse orders rather than invest in new equipment


Economic downturn causes companies to refuse orders rather than invest in new equipment

One third of UK companies are turning down orders rather than investing in new equipment, according to a survey by Lombard.

UK companies are turning down orders rather than investing in new equipment

Lombard, which the UK’s largest asset finance provider and part of the Royal Bank of Scotland Group, estimates the potential worth of the rejected contracts is upwards of £5.4billion to the SME market alone.

More than 40% of the businesses surveyed which are not committing money to capital assets cited their reluctance to invest in the current economic climate. Despite this, a quarter said they are operating with equipment that needs replacing, and of those nearly three-quarters said this is costing them in terms of higher maintenance bills, while 65% said it is resulting in lost orders.

Benefits of asset finance

Awareness of asset finance is low with only a third of those surveyed being familiar with it. But this type of funding, which allows them to invest in new equipment - from traditional plant and heavy equipment to new IT and technology - offers several benefits to the borrower:

  • Minimising ownership risk: The lender takes the risk on how much value remains in the asset at the end of the contract, and take responsibility for the disposal and management costs associated with ownership
  • Releases tied-up cash: Sale and leaseback frees up the value within the asset and avoids having to draw on cash reserves that may be needed elsewhere in the business and that can be used to fund growth
  • Opens up additional credit lines: By acting as an extra facility that uses the financial value of a business’s assets to complement cash resources and existing bank credit lines, such as overdraft facilities
  • Delivers funds quickly and efficiently: The security within the asset can result in prompt turnaround of credit applications
  • Eliminates uncertainty: Fixing the rental costs and payable interest for the duration of the contract helps a business plan for the future by eliminating uncertainty and costly surprises
  • Cuts wasted spending: The rentals reflect usage of an asset for a portion of its reusable life – this is an important value added benefit where customers are expected to use it for part of the asset life. It allows your business to fund almost any tangible business assets

The research shows that, of the companies that had increased capital expenditure, more than three quarters found their profits had increased or stayed the same.

Business growth

Coventry based Exactaform, the UK’s largest manufacturer of specialist aerospace, motorsport and automotive applications, funded three new machines, known as Vollmers using asset finance from Lombard. The investment has enabled the business to grow its plant from 8-11 machines and almost double its turnover from £1.8 million to £3.5 million. The staff employed also grew from 24 to 28.

The UK lags behind other countries such as Germany, Italy, Switzerland, Turkey and Mexico in relation to investment and purchase of specialised production machinery.

Ian Isaac, Managing Director, Lombard said: “Our international competitors are ahead of the curve in both their investment in manufacturing as well as their greater use of asset finance. We have seen a 66% increase in our lending to the manufacturing sector in the past year. But more needs to be done as the research shows low awareness of what this form of funding can offer.

“We are pleased that the Government has announced an expansion of the Funding for Lending Scheme to include asset leasing. This measure and the Annual Investment Allowance which increases the allowance for purchase of capital equipment (100% allowance up to £250,000 for capital expenditure on plant and machinery for two years from January 2013) are time-specific options which we hope will provide incentives for companies to invest.”

The survey found that of those businesses that are investing in new equipment, 62% use existing reserves, 26% take out a bank loan while 17% use an overdraft or other facilities. Asset finance was used by only 5% of those surveyed.

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