P&M Finance

Raising business financePlant and machinery finance can involve either:

  • funding the acquisition of new machinery; or
  • raising business cash by refinancing against your existing equipment.

    In addition to straightforward loans, where you then use the cash provided to purchase an assets, there are also a range of financing arrangements available for plant and machinery such as:

    • Hire purchase, where you buy the asset by making payments in instalments over a set period which may include a final larger bullet or balloon payment at which point ownership passes to you from the finance company; and
    • Leases, where ownership always remains with the finance company.

    These types of arrangement are readily available from a wide variety of financial institutions and to get the best deal you will need to shop around. Your starting point can therefore be:

    1. The seller as they may have existing arrangements with a finance house whereby they are able to arrange your funding. This can be expensive, but in some cases sellers who are looking to move their products, such as car dealers, may be able to offer advantageous financing deals such as 0% interest;
    2. Your bank, which will have a full range of products available through its specialist in-house subsidiary; or
    3. Independent specialist lenders.
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    Raising Cash From Plant And Machinery

    Refinancing plant and machinery is an increasingly popular way of raising trading funds for businesses, as banks traditionally do not ascribe significant security value to such assets for lending purposes.

    Financing in this area is by way of a sale and leaseback of the assets and is driven by asset valuation.

    To be financeable, plant and machinery in general has to be clearly identifiable, of significant size (so no small tools), have a significant remaining working life and be readily removable and realisable.

    Machinery that is too specialised or built into a property to the extent it would be difficult to remove will attract low valuations and be difficult to finance. Similarly, it is traditionally difficult to arrange this type of finance for IT equipment due to the steep depreciation and low residual values attaching to it.

    There are three main sources of this type of refinance funding:

    1. The banks‘ in house asset finance subsidiaries, but as these have a significant captive market of bank introduced leads they tend to be less quick to move on externally introduced opportunities and less flexible on deal structure. In practice, other than as part of arranging the finance for MBO/MBIs, it is our experience that most bank owned asset financers are not interested in refinancing transactions.
    2. Structured finance providers, where the larger invoice discounters are adding on plant and machinery and/or property finance capabilities in order to be able to provide companies with a full refinancing package. These lenders tend to be interested in larger deals and only those that involve a debtor financing element.
    3. A limited number of stand alone asset financiers who are the specialists in undertaking stand alone plant and machinery refinancing deals.

    A sale and leaseback will typically be over three to five years. Interest rates vary dependent on the business circumstance but might typically be a flat rate percentage in the range 10%–15%, although there are lenders dealing at the high risk end of the market who are charging bridging levels of rates equivalent to 20%+.

    Arranging to refinance plant and equipment is a relatively straightforward process that begins with a valuation of the equipment.

    You therefore need to prepare a list of the available machinery giving the basic details set out below. Your broker or advisor should then be able to obtain a desktop valuation from the lender which will give an indication of how much can be raised on the assets available.

    • Item
    • Make
    • Model
    • Serial No
    • Age
    • Date acquired
    • Bought new or used?
    • Cost when new
    • Usage (mileage, impressions, etc)
    • Finance owed
    • Condition

    Lenders vary in their approach to valuation and therefore their advance, so it is worth having your broker or advisor explore the options.

    Some lenders seek what could be described as a surveyor’s valuation of what the equipment is likely to be worth if sold, and will then lend up to 70% of this figure.

    Others will seek a more specific dealer valuation as to what could really be obtained in today’s market, which tends to be lower, but will lend closer to 100%.

    This is a marketplace with only a handful of main players so it is important not to spoil your prospects. Businesses will often contact a number of brokers to try to find them a deal in the belief that this competition will help. In practice it tends to work against you as by the time the lender has had the same deal referred into them from half a dozen brokers, the tendency is to feel either there’s something wrong with the deal, or that the client is desperate and the price can be adjusted accordingly.

    It is also an area where a number of the lenders’ terms are negotiable and whilst brokers will charge for arranging such finance, they are likely to be able to get you a better deal than you would be able to get yourself by going direct to the lender.

    Having established the level of equity available the lender may seek permission to undertake credit reference searches on the company and its directors before issuing an indicative offer of terms.

    If these are acceptable, the company will need to commission a formal valuation of the equipment from one of the valuers on the lender’s panel. Once this is received by the lender, they can then issue a formal offer and the proposal is authorised by its credit committee. It is then up to the company to accept the offer and on completion of the paperwork it can draw down the funding.

    As part of any transaction:

    • all HP or other finance (such as peppercorn rentals) will have to be cleared on any currently financed assets to be included in a sale
    • a letter of priority will have to be obtained from any existing fixed or floating chargeholder such as your bank so that the finance company can ensure it has clear rights to the asset
    • an agreement will be needed with any landlord for rights of access to allow the finance company to collect and/or sell assets from site, as well as in some cases an agreement as to the limitation of the landlord’s rights to distrain on plant and machinery for unpaid rent.

    Lenders may also seek specific assurances as to business performance (for example that Crown debt is up to date, or an agreed schedule of repayments being adhered to).

    Lenders will also want at a minimum directors’ warranties that the assets to be financed belong to the company and once financed, will not then be sold without the lender’s consent.

    Lenders vary in their requirement for Personal Guarantees (PGs) from directors. Some deals are done without, other lenders insist on a limited PG of say up to 25% of the sum lent to ensure that the directors adequately maintain and protect the financed assets.

    Key Points to Remember

    Match long-term funding to long-term assets

    Finance is a two-way street:

    • you can raise it to buy assets; and
    • you can also use owned assets to raise cash

    Financing the acquisition of new plant and machinery is a very wide market where you will need to shop around.

    Refinancing plant and machinery is a very small market where you should take advice and care not to spoil the market for your particular deal.

    If you cannot provide accounts or you have a history of losses or adverse credit history, you should still be able to obtain some refinancing, but you will pay an interest rate premium for doing so.

    Information provided is copyright and subject to the Important Notice on the home page.

    Of course the information contained in an article like this can never be a full statement of the legal position as the relevant laws are complex and liable to change. This article can only therefore be a general guide as to the issues involved and as these can have serious implications you should always seek appropriate professional advice on your own particular circumstances before taking any action.

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