By Daniel Hunter

Businesses across the manufacturing sector are increasingly using their balance sheet strength to lend directly to customers says LPM Outsourcing, the leading provider of services to the asset finance market.

LPM Outsourcing (LPMO) says larger manufacturers are now developing their business by setting up “captives” to fund their customers’ purchases of the goods they produce.

A rising number of manufacturers are doing this because many of their small and medium sized business customers can’t access the bank funding they would normally get to make these purchases.

“A lot of large corporates have spent the recession reducing debt and hoarding cash — so they have strong balance sheets whilst the banks don’t,” Ian Dennis of LPMO said.

“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.”

The ITEM Club estimates that UK companies are sitting on some £754billion in cash, which is around 50% of total UK GDP.

Ian Dennis says that a growing number of the bigger manufacturers set up “captives” where the lending decisions can be made independently from the sales team who are selling the products.

These captives will also look to make a profit on the funding that they provide — which should more than outweigh the credit risk that they are taking on.

“As the banks aren’t in a position to lend to a lot of small businesses the margins that these captives can lend at can be very attractive,” Dennis explains.

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

Manufacturers that have expanded their captive lending programmes recently include Ricoh and Hyundai.

Dennis says that the use of captives is part of a growing wave of alternative lending when compared against the more traditional bank forms of finance. Another area that appears to be gaining momentum is “peer to peer lending” which are growing to fill the gap left by traditional bank lending that has been hit first by the credit crunch and now by the Eurozone crisis.

“We are talking to several manufacturers who are looking to expand their UK and European sales and see the use of captives as their preferred mechanism for doing that,” he added.

Even without the pressure that bank balance sheets are currently under, captives can often be better long term providers of asset finance than traditional banks.

A manufacturer might be able to make a better lending decision than a bank as it will have a stronger understanding of the resale value of the asset that the funding is secured. If the borrower fails to perform on the loan and the asset has to be seized then the manufacturer will also have a sales channel with which to resell the asset.

LPMO explains that the ability of a lender to accurately assess the resale value of the asset that it lends against will become increasingly important as there is a shift towards operational leases where the residual value of the asset is a much bigger concern than in a finance lease.

Captives are now a growing force in the market place and with growing their size comes the improved ability to tailor specific products to their customers.

“Captives represent a key growth area in the asset finance market – the decline of traditional funding as banks move away from non-core activities means that the manufacturers must step in the breech,” said Dennis.

“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. 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.”

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