Member Article

Manufacturers lend directly to encourage growth

Manufacturing firms are capitalising on their strong balance sheets to lend directly to customers, as increasing numbers of firms struggle to gain access to much-needed bank funding.

According to LPM Outsourcing, increasing numbers of large manufacturers are attempting to develop their business by establishing “captives” to fund customer purchases of the goods their produce.

Many are choosing to do this to help their SME business customers who are struggling to access the necessary bank funding which would ordinarily be used to make these purchases.

Large businesses are able to help, because they have spent the recession reducing debt and hoarding cash, meaning that their balance sheets are often much stronger than the banks, according to Ian Dennis of LPM Outsourcing.

He commented: “These manufacturers want to keep driving sales to their customers who, despite being perfectly good credits, just can’t get loans from their usual banks.

“It is a win — win situation. The big manufacturers get to make more sales and the smaller businesses can make essential investments in business assets like plant, machinery and computers that they wouldn’t otherwise be able to afford.

“It is helping smaller businesses to make capital investment and expand by using all that cash that has built up on the balance sheets of the biggest corporates that might otherwise be sitting there idly making next to zero interest.”

It has been estimated that companies in the UK have cash reserves of around £754 billion, which amounts to around 50% of total UK gross domestic product. This has resulted in the establishment of “captives”, where lending decisions can be made independently from the sales team who are selling the products.

The captives will also look to make a profit on the funding they provide, and will outweigh the credit risk they are taking on.

“Many captives do so well that they can become major contributors to the overall profitability of the parent company.” Mr Dennis added.

Creating a captive would once have meant a substantial investment in infrastructure and staff, which could sometimes act as a barrier to entry. However, most of the services and components needed to build a captive can be bought off the shelf.

Mr Dennis concluded: “Outsourcing can effectively provide a turn-key solution, providing software platforms, staff and operational experience. So the establishment of a captive can now be completed far faster than in the past.”

This was posted in Bdaily's Members' News section by Ruth Mitchell .