Lack of Lending Forces Small Business to Turn to Manufacturers

Posted on 24 April, 2013 by Kirsten Kennedy

When the economic crisis led to full-scale recession in the UK many blamed the banks for the situation, claiming the larger chains had ushered in a culture of reckless lending and irresponsible investment.

The taxpayer was forced to bail out chains such as the Royal Bank of Scotland and Lloyds as a result of poor management decisions – yet unfortunately it now seems that the banks have no confidence in lending, despite the fact they are once more financially secure.

A report for the Department for Business by the National Institute of Economic and Social Research has found that small firms are now less likely to be granted a loan than before the recession hit even if their credit history was identical at both points in time. As a result rejection rates have soared, especially when a new line of funding is being sought.

In the analysis it says; “The research is indicative of an economically damaging shortage for small and medium-sized enterprises, reflecting banks’ attitudes to risk.”

Of course, SMEs must have funding from somewhere in order to firstly launch, and then as a means of additional support in financially difficult times. This help is increasingly being provided by manufacturers, who are being forced to finance their business customers’ orders as a means of remaining operational themselves.

The value of sales finance deals rocketed by 11 per cent between 2011 and 2012, with figures standing at £5.3 billion and £5.9 billion respectively. Most of these deals are used by manufacturers of expensive or large products, such as machinery or computer technology firms, to alleviate the pressure of paying upfront from small businesses.

Manufacturers can choose to assist their customers in one of two ways, depending on the cash reserves they control. The first option, known as a captive finance scheme, allows the manufacturer to subsidise the sale to the customer and allow them to pay off the debt slowly.

For those who deem this route unsuitable financially, negotiating with a leasing specialist in order to provide a bespoke funding package has become popular.

LPM Outsourcing works with the asset finance sector by providing administrative services, and business development director Ian Dennis claims that the number of manufacturers looking to set up one or other of these schemes has increased since the economic troubles began.

He says; “Lending conditions, especially to smaller firms, have been tough for so long that manufacturers are increasingly using captive and other sales finance to unlock sales.

“It gives business customers an alternative way to fund investment and gives the manufacturer a way to tap into pent-up demand.”

While this solution may work in the favour of larger manufacturers, there is a concern that a lack of lending from banks is causing severe problems for smaller manufacturers which cannot afford to support their customers. And with the manufacturing sector often failing to meet targets in the UK today, surely this is one responsibility which should not be resting upon their shoulders?




One response to “Lack of Lending Forces Small Business to Turn to Manufacturers”

  1. Mel says:

    It certainly shouldn’t be down to the manufacturers to support these small businesses – many manufacturers need support themselves. I wonder if this will create a competitive market within the manufacturing industry – if a manufacturer does not allow a finance scheme, will the small business go elsewhere to one that does? This is going to hurt small manufacturers who cannot afford to accept terms like this.

    Mel

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