Ian Barker — managing director (manufacturing) of Close Brothers Asset Finance, which has over 30 years’ experience of working with UK SMEs — says the engineering industry is an essential part of the UK economy, employing more than 5 million people and contributing £1.06 trillion in turnover.

“Now, as always, engineering plays a central role in ensuring sustainable economic growth, and the outlook for the industry is positive.

“The European engineering industry has been set the ambitious goal of increasing its output to more than 20% of the GDP by 2020; and while there are many UK firms with the capability and determination to rise to this challenge, generating this growth will require investment to replace worn-out or obsolete assets that are no longer sufficiently productive or cost-effective.

“Having worked in asset finance for many years, I took it for granted that everyone knows what it is.

“However, 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 — since 2013 — remained stubbornly at around 40%.”

Mr Barker describes asset finance as an alternative form of finance used by businesses to obtain the equipment they need to grow, highlighting the more common types as: hire purchase (HP), which allows the customer to buy the equipment on credit (the finance company purchase 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); and refinancing (capital release), which sees the finance company purchases the asset and ‘finance’ it back to the customer (repayments are calculated in line with the income stream that will be generated by the asset, and at the end of the refinance term, the customer owns the asset) (www.closeassetfinance.co.uk/asset-finance).

Also included are finance lease, with which 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 customer can choose to: continue using the asset by entering a secondary rental period; sell the asset and keep a portion of the income from the sale; or return the asset.

Meanwhile, operating lease — similar to a finance lease — allows the customer to rent the asset while it is needed.

Reduced rental cost

Mr Barker said: “The key difference between the last two is that an operating lease is only for part of the asset’s useful life.

“This means the customer pays 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.

“The beauty of Asset Finance is its flexibility, as it can be used to finance any asset, including all types of CNC machines such as borers, lathes, milling machines, press brakes and laser. In fact, there is very little that we won’t consider financing.

“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 cash-flow, making the otherwise unaffordable affordable by giving businesses access to the equipment they need without incurring the cash-flow disadvantage of an outright purchase — and agreements can be customised to a business’s needs, with flexibility regarding both the term and repayment schedule.

“Our team of engineering finance specialists — many of whom have an engineering background themselves — work with businesses across the UK to provide finance for both new and used engineering equipment.

“As industry experts, they understand how vital it is that you have the right equipment.”

One company to benefit from Close Brothers Asset Finance’s expertise was Newfield Fabrications Co Ltd, a family-run business that had been trading since 1965, specialising in producing high-quality mild-steel fabrications with a range of finishes.

The owner was looking to retire and sell the business to a management buy-in team, thereby presenting the finance company with the opportunity to help an experienced group of professionals looking to acquire a well-regarded business with a strong track record of profitability.

Mr Barker said: “As part of the deal, the existing managing director would remain in situ to ensure the smooth running of operations; we provided a ‘Sale and HP Back’ form of financing against Newfield’s machinery over five years.

“Alongside this facility, Close Brothers Invoice Finance provided a new ‘invoice discounting’ facility, with a cash-flow loan of £300,000 to be amortised over a three-year period.

“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.”