Britons love having someone to blame. At points during the past five years bankers have been portrayed as pariahs of society – or as pariahs within the state when huge chunks of the banks were swallowed up by government.
As the narrative of the recession grinds along the bottom like the flatlining economy, bankers remain firmly in the firing line. It’s easy to knock them but perhaps more difficult to establish a credible picture of how they are performing.
Manufacturers’ organisation the EEF has consistently highlighted two issues that it thinks afflict the banking system to the detriment of engineering firms. One of these is a failure since the financial crisis of banks to lend to manufacturers. The other is a lack of competition among banks on the high street.
But what do individual manufacturers make of it all? The picture that emerges is mixed, and not as negative as one might imagine, with the larger firms seemingly having fared better with the banks than their smaller cousins. Publicly listed Avingtrans, which makes precision components for the energy, medical and research markets, is a case in point. Steve McQuillan, chief executive of the Nottingham firm, says the business has done relatively well during the recession. “We’ve grown quite quickly and had a lot of cash requirements, working capital requirements, but one way and another we’ve got through that,” he says. “We’re with HSBC and, to be fair, they’ve done a good job for us. They’ve been pretty supportive through the recession.”
This is not to say that things have been easy. “There have been pinch points and tight times,” McQuillan concedes, “for us as for other manufacturers.”
Andrew Churchill, managing director of Nuneaton’s JJ Churchill precision engineering, says he is also happy with his bank, Lloyds. But he adds: “If I speak to my peer group there is a very big problem out there. There’s been, over the last 10-15 years, a massive deskilling of corporate and institutional banking. The days of the regional bank manager knowing his or her local companies have gone.
“I speak to precision engineering firms in the Midlands and they are not dealing with bankers who empathise with or understand what they are doing, or have experience of their sector or opportunities.”
Phil Elliott, managing director of Booth Dispensers, a Blackpool company that makes vending machine equipment, says decisions on lending are made by credit committees that have little experience of the business, even if the local bank manager has visited. “It goes to a committee somewhere that knows nothing about my business and has very little insight into what we do,” says Elliott.
“In the past, corporate finance was all about backing the management team. But they don’t know me: we’re a number on a sheet. But if you can get the credit committee to come in and see your business, I have achieved the money we were looking for.”
The banks say they are working to overcome problems such as these. Carl Williamson, relationship director at Lloyds Banking Group in London, is a manufacturing specialist. He says he has sent more than 100 of his staff on courses at Warwick Manufacturing Group to prepare them to deal with engineering companies. He argues that the bank is making a greater effort in this regard.
“From Lloyds Bank’s perspective, there is real desire to grow what we are doing in the manufacturing space; a real desire to become more knowledgeable, skilful, and to boost our expertise,” he says. Williamson says Lloyds Banking Group lent more than
£2.6 billion to manufacturers in the first nine months of last year and has pledged a further £1 billion, £600 million of which has already been loaned. “We don’t want to stop there. We’re not going to stop when we hit a billion,” he says.
Chris Sullivan, chief executive of the Royal Bank of Scotland’s corporate banking division, says: “I think for too long banks have treated their customer base as a big homogeneous group – they’ve not sought to differentiate, or understand the differences, so I have specialist areas within the business devoted to manufacturing.”
Sullivan says RBS is the lender for a quarter of all UK small businesses and last year stumped up 36% of all money lent to them. “We’re punching above our weight.” He argues that because firms have been paying off their debts over the past four years the net figure for lending is lower than it might otherwise be. “My biggest issue right now is that people are paying down debt faster than they are borrowing,” he says.
An additional factor is that lending for commercial property was high before the recession and has since slumped, says Sullivan, dragging down lending figures.
Steve McQuillan of Avingtrans acknowledges elements of Sullivan’s argument, saying: “Although our sales have doubled, so we’ve grown very fast, despite this, we’ve actually borrowed less. We’re an AIM-listed manufacturer in the City, and debt became very unfashionable: everybody wanted to see you knocking your debt down and repaying and, of course, that didn’t help the banks.
“If people are trying to pay off debt, they won’t take whatever money’s being thrown at them. That’s an issue affecting the banks that is not of their own making.”
Some believe that there is, as much as any failure to lend, a choke on demand for finance in this economic climate. Sullivan claims that RBS is not constrained by a need to shore up capital. He says: “I could lend £10 billion like that, and would be delighted to. We’re not perfect, and don’t pretend to be, but people are nervous about investing in their businesses right now.”
Williamson argues that “there is a lack of confidence. That comes through in all the surveys. One month it’s up, one month it’s down – it’s a bit like the economy, sort of bumping along. But we need to be ready at all times to say to clients and prospects that, if you need funding, we’re here to help.”
An established relationship with a bank is valuable, says McQuillan: “I know of manufacturers who have had real difficulties because they are trying to change banks or the relationship with the existing one has fallen apart. When you’re inside the corral it’s OK, but if you’re trying to get in it can be difficult.”
Consistency is important, he says. “You want consistency over the long term whether it’s good times or bad times. You don’t just want money when everybody’s throwing it at you. You want consistency of partnership when times are tight and it’s more volatile.
“HSBC hasn’t been punitive with us during the recession – they haven’t put rates up – although you do hear horror stories from other manufacturers regarding banks.”
Some of these have revolved around the ability of newer businesses to secure a bank’s backing. “If you’re a small, developing manufacturing business and you’ve got capital requirements and you can’t get a relationship going with the bank – you’re really going to be stymied by that.”
McQuillan adds: “For a while the banks just weren’t taking on new customers; for a good period they just shut the doors.”
It helps to have a coherent plan of action, the engineers agree. Andrew Churchill says: “If you’re a small firm and you can’t get access to funding, but you haven’t got a business plan, don’t complain – that’s your side of the bargain. You need a cogent business plan, not just a budget for one year, that’s been rubber-stamped by your senior management team, and takes into account customers and suppliers.
“It needs to be in the bank’s language, numerate and articulate and, as an engineering business, you invite your bank in in advance of when you need to borrow.” Williamson of Lloyds Bank says: “If clients are talking to their bank regularly about their plans, that will help. It doesn’t mean that in every instance they will get credit approval for what they want to do, but certainly it’s far more difficult if you haven’t had the conversation and suddenly pitch up and say: ‘I need a hundred thousand for this project’.”
Phil Elliott of Booth Dispensers echoes the point: “If you ring up the day before you need the money and say ‘I’m in trouble here’ you’re not demonstrating you’re in control of the business.”
Craig Naylor, managing director of NTR (see box overleaf), says: “You definitely need a credible business plan, and it needs to be supported by evidence.
“We have a non-executive director that’s been working with us for a long time, and he’s a good sounding board for me. I’ve come from a strong corporate background, so for me you don’t do anything without a reasonable plan behind it.
“For a small business, we employ full-time management accountants who know exactly where our numbers are. We’re very diligent in that respect. We’re good with our forecasting and therefore there’s a higher degree of confidence in any lending. These are areas in which perhaps some of the small firms who can’t get funding are struggling.”
Churchill says: “There’s a naivety among some of the smaller engineering companies in communicating why they are a good risk. On the other hand, unless bankers take away that simple ‘computer says no’ paradigm we’re not going to see any difference in terms of access to finance.
“What we need is people who are based in a region for a period of time whose job it is to understand their local manufacturers, and they are going to hold the position for a while. Their job should be to build relationships to get beneath the surface of their local manufacturing companies and to understand why they are a good bet.
“We don’t want our banks lending to poor manufacturers who are going to go belly-up. We want them to be selective, but we want them to take a bit more time and effort to understand us locally.”
Encouragingly, the manufacturers surveyed by PE were cautiously optimistic about their prospects, despite the somewhat doom-laden nature of reporting on the economy. Most agreed that developing sales in economies outside Europe was going to be crucial.
McQuillan says Avingtrans has already established two wholly-owned subsidiaries in China. The health of the aerospace industry is crucial, he says, and the “international rather than global” firm follows its customers such as Rolls-Royce and GE overseas.
“It’s not about the immediate environment – export markets are more important,” he says. “But we’re really keen on being a UK company. We pay tax in the UK, create employment, and intend to develop as part of the national infrastructure.”
Naylor of NTR says that European markets have slowed, although the company has established an operation in Poland in the past year. While France and Germany have proved more challenging to crack, the domestic market is relatively healthy.
He says: “We’re seeing small degrees of growth, it’s very stable, there’s a lot of investment and development work going on, and many exports to emerging markets. It’s fantastic because we have been the recipients of that success – when people break a tool it’s because they are cutting metal, and that is business for us.”
Churchill, however, issues a stark warning that any rapid upswing in manufacturing’s fortunes could prove more problematic than the recession for many firms, especially if credit is hard to come by.
“Actually what is more concerning is the upswing when working capital demands go through the roof,” he says.
“Your customers get busier – they will be placing more orders, a few months out, and engineers will be having to buy more raw materials for which they will have to pay – even though OEMs only pay 120 days out. That’s where we’re going to see real difficulties further down the supply chain, particularly with castings and forgings in my sector.
“For people outside engineering, who don’t understand the long lead times, this is slightly counter-intuitive – the bad times should be during the recession. But if working capital gets gobbled up in an upturn, we could see supply chains crumbling.
“And if they do crumble then what we will find is that the OEMs aren’t going to get the product they need and they will have to start looking overseas.”
Talk of an impending reversal of fortune may seem premature. But if Churchill is right, there is more call than ever for banks to engage with industry and make an effort to understand its unique demands.
‘Banks don’t understand our long-term investment needs’
Craig HarrisonManaging director, Aquaread. Makes water quality testing instruments
“A year ago, we approached a number of banks to try and leave the bank we were with. We weren’t happy, and we weren’t getting a good service. But what the other banks were offering wasn’t competitive with our existing arrangements.
“They wanted guarantees secured on our property to get an overdraft for 10 grand. They were really unhelpful. Since then we have found relations with the banks very dislocated. The bank we approached originally had an export department, and we do a lot of exporting. They were the department we should have dealt with but we weren’t put in touch. There were better schemes we could have been offered.
“The whole banking system isn’t set up very well. We’re in quite a niche market and it’s quite difficult to get people’s heads around what we’re doing.”
Peter Duncan
Director, Cressall Resistors. Designs and makes electrical resistors
“It’s convenient to bash the banks and say they should be lending more. But when I look at my fellow businesses, small firms might not be as cash-strapped as we think.
“A lot of businesses are probably not cash-constrained but if they wanted to borrow from the banks it would be for equity. The magic missing ingredient is not cash but confidence.
“We’re OK with our banks but that can only be because we haven’t made great demands on them: we’re lucky enough to be a family-owned business, profitable for the last six years.
“One of the things you do automatically is to maximise the extent to which you are not beholden to the myriad people and institutions who would like to make you dependent on their money. And, to be sure of that, you conserve your cash so that you aren’t blown off course by a few years when the economic cycle goes against you.
“I’m mystified by this ‘banks won’t lend to business’ story. Banks won’t lend to rubbish propositions any more than they ever have done – and I’ve never seen solid evidence for the alleged linkage between lack of funding for business and the banks need to improve their capital ratios.”
Craig Naylor
Managing director, NTR. Repairs tooling
“We try to be innovative and we work with a bank and an alternative finance provider. The banker bashing – we’re way past that. Banks have to be sensible about where they are lending; lending has to be in part secured. The terms are tight and they want security.
“But some small businesses are saying ‘I don’t want to do this’. Why should I risk my plant, my machinery, my home? Rather, we’ll fund this ourselves, build up profits – rather than going to the banks. It’s not a risk for them. The risk is all on my shoulders. Why should I expose myself to that?
“We work with RBS and they recently wanted to move us to a different part of the portfolio. We chose not to and ended up with a different bank manager who doesn’t understand manufacturing.
“There is still this fundamental problem that they don’t understand the long-term investment that’s required and the potential risks. Even though we had a credible business plan during the recession and we’ve delivered, the relationship has changed.
“Does that give me confidence in the bank? None whatsoever.”