Manufacturers get into the lending game
Tuesday, April 3, 2012
Before the economic meltdown, it was all too easy for printers to raise finance for investment in new equipment, recalls one print industry stalwart. "You simply filled out some forms, signed on the dotted line and the cash was there," he explains. "There was very little due diligence undertaken with no checking of accounts or order books and no real discussion around how the printer intended to use the new piece of kit."
How times have changed. Today, if a printer wants to finance a new investment, he has to lay all his cards on the table. He needs to produce up-to-date accounts, show the list of orders he plans to fulfil and he also has to set out a thorough business plan for the future. It’s a time-consuming, bruising encounter and the outcome is often not what the printer hoped for or expected.
But with large numbers of financial institutions closing their lending books to the printing industry, it’s an experience that more and more printers have had to go through over the past couple of years. And it’s the key reason why equipment manufacturers who are anxious to fill their order books, have had to resort to desperate measures to ensure that a deal goes through. These measures even entail the creation of in-house finance divisions. It’s a strategy that some manufacturers believe sets a dangerous precedent.
"Unless they have a fully fledged finance operation, run by financiers, like some of the digital suppliers have, manufacturers should stick to what they know and are good at, which is producing machines," argues John Gilmore, managing director of Autobond. He adds that "in the current climate it is a bold manufacturer who starts to fund their own machinery", but the harsh economic reality is that in the current climate this is the only way that some deals are going to get off the ground.
Indeed, for some manufacturers, financing deals is becoming a big business in its own right. Take Ricoh, for example. Of its commercial print transactions, around 85%-90% are funded through its finance arm, Ricoh Capital.
"Twelve months ago, we were able to get clearance on 60% of deals, whereas today it’s up to 90%," explains Ricoh UK production print director Stephen Palmer. "There are a couple of reasons for that: Ricoh traditionally worked on balance-sheet decisions – we looked at the net worth of the company and its cash position and then we would make a decision. But we realised that that wasn’t enough, because a lot of print companies are quite healthy in terms of their operation, but their balance sheet doesn’t look great."
So the company changed the way that it evaluated a potential customer’s financial status. "Now when we get an order in, we send a finance specialist out to meet the customer to go through their business," says Palmer. "We look at the competitors in the same town, we look at the profile of the business and we make sure that we understand the order book. Then we take all that information and look at more subjective criteria such as the feel-good factor – does the company have a young, dynamic management team, for example?
"We then combine that with the balance sheet and come to a decision. As a result of this approach, and the support of our parent company Ricoh Europe, we are clearing a lot more deals."
Employing greater levels of due diligence is also the approach favoured by Canon, which works with finance partners GE and BNP Paribas. Canon UK professional print channel director Wayne Barlow says these institutions bring a lot more to the table than just cold hard cash.
"They meet the client, help them construct a business plan and they help the printer look at the risk that they are taking and show them how they can mitigate that risk," explains Barlow. "We haven’t really been hit at all by bad debt and I think that’s where GE and BNP have been really good because they’re not just looking at accounts, but they’re doing thorough due diligence and holding thorough discussions and honest dialogue about the state of a company’s finances."
These types of conversations couldn’t have happened pre-recession, believes Barlow. "Three and a half years ago, if you had asked to look at a printer’s accounts, he would have been horrified. But today, they’re getting much better at understanding the constraints around borrowing and, as a result, they’re much better prepared to answer difficult questions."
The understanding within finance houses of the nuances of the printing industry has also come on in leaps and bounds over the past few years, according to Autobond’s Gilmore.
"We use Compass Business Finance who have experience in the print market and understand the equipment, maximising the chances of our customers getting finance," explains Gilmore.
While Autobond’s laminators may be considered small beer from a finance point of view, the same principles apply at the other end of the scale, where industry behemoths like Heidelberg have also been developing strong relationships with finance providers to ensure their customers have continued to access financing even during the height of the recession. The press manufacturer works closely with Société Générale (SG) and Heidelberg managing director Gerard Heanue claims that SG has grown its print finance business significantly over the past three years by financing Heidelberg equipment. "They understand the print business, the strength of Heidelberg and our customers’ requirements," he says.
In addition to helping printers get funding for big-ticket items, the German press manufacturer has also continued to offer customers what Heanue describes as "soft financing" for smaller capital equipment, such as CTP, folders and stitchers, through consumables deals.
"The customer will commit to purchase our consumables at an agreed price for the lease term and we will pay the monthly repayments to the finance company on the customer’s behalf," explains Heanue. "The benefit is that the customer only buys consumables when they are busy and therefore does not have to pay a fixed monthly repayment to the finance company."
The helping hand provided by the likes of Heidelberg has clearly helped many print businesses survive trying economic times, but this type of assistance also neatly leads us back to Gilmore’s point about whether or not manufacturers should stick to making equipment and leave lending up to the lenders. It’s a valid point although Rijk Pleijter, leasing manager at Océ, thinks the real question in this debate is to what extent should equipment funding be a core activity for the manufacturer?
"The offering of finance certainly requires a different knowledge and skill set than what is needed for the manufacturer’s core business," says Pleijter. "Finance is inherently about the management of risk related to rewards, but is a bank better placed to manage such risks in comparison to the manufacturer? It could be argued that a manufacturer not only has a better understanding of the dynamics of a particular market segment, but is also in a better position to understand the real value of the assets involved and the related future technology and obsolescence risks."
Whichever side of the fence you fall on in this debate, Pleijter thinks that it’s a scenario we need to get used to as it will increasingly become the norm rather than the exception. "Given the current banking trends, it is likely that manufacturers will begin to view funding as a more core-critical part of their business model and it is likely that more resources will be invested into developing robust customer finance packages for the future," concludes Pleijter.
Of course that argument only stands for as long as the lending freeze continues and there is growing anecdotal evidence that the thaw has already begun. Heidelberg’s Heanue reports an increase in the number of banks willing to finance printing equipment in the past six months and Ricoh’s Palmer thinks "we will see the banks coming back with some creative packages soon, which will be a good thing because I think the printing industry is more optimistic than the overall economy probably is".
Even the unnamed industry stalwart is feeling pretty optimistic about the future with his order book looking relatively healthy at the moment. It’s his firm belief that UK Print PLC will emerge from the downturn in much better shape than before it entered it.
"People had taken their ability to get finance for granted for far too long and I’ve seen some good businesses go out of business because they over extended themselves," he explains. "As a result I think the recession has been a good wake-up call for the industry."
CASE STUDY: Hawthornes Printers
Nottingham-based Hawthornes Printers had been a purely B1 litho operation for years, but the company realised that it needed to invest in digital equipment if it wanted to respond to market demands for short-run, quick-turnaround work. After looking at a number of different options Hawthornes opted to buy a digital press from Ricoh, and after weighing up the different financing routes available, it also reached the same conclusion about the press manufacturer’s finance package.