Friday November 24, 2023

Examining which financial initiatives will support manufacturers – and at what cost?

Despite persistent interest rate rises and an uncertain economic backdrop, the UK manufacturing industry has continued to demonstrate strong resistance to the challenging conditions of the past 12 months.

Indeed, while operating costs – including energy and wages – remain high, and post-Covid and Brexit-related supply chain challenges persist, many of the gloomiest predictions being made at the end of 2022 have failed to materialise and there are signs that some economic indicators are improving, albeit slowly.

So it’s reassuring that findings from our latest manufacturing report Against the odds: The future of UK manufacturing reveal that not only are UK manufacturers displaying impressive resilience, while being markedly more optimistic about their future, but crucially, many are now moving onto the front foot in pursuit of growth.

Showcasing the views of a diverse selection of more than 300 of the sector’s senior decision makers, our research found that four in five (81%) of respondents are planning to invest at least the same if not more than they did last year, with only 13% planning to invest less and just one in 20 not planning to invest at all (5%).

But for those manufacturers looking to secure backing to support future growth ambitions, finding the right funding partner isn’t always straightforward.

While much has been made of expensive initiatives in the US and Europe to hand manufacturers various grants, incentives, and tax breaks to support the transition to green technologies, investment in the UK has stalled in the face of ongoing economic uncertainty. However, some ground has been made up by the unveiling in the Autumn Statement of a new £4.5 billion support package for manufacturers in automotive, aerospace, life sciences and clean energy.

Our findings revealed that the most popular route for manufacturing businesses to fund their investments is through existing cashflow or facilities (41%), but there is also a significant cohort who will be going to market to source funding.

Almost a third (31%) of respondents said that they plan on securing new facilities from existing lenders, while a similar proportion (30%) will seek to extend facilities with their existing lenders. The same number of manufacturers plan to find new lenders (30%) as plan to seek new equity investors (30%). While we believe that banks continue to be supportive and accommodating in respect of the funding positions they already hold with manufacturers, advancing new and additional finance is becoming increasingly difficult. For manufacturers with weak balance sheets and debt service capacity, this could mean that equity is the answer.

The lender view is that the geopolitical events of the last few years have contributed to a lack of security, with balance sheets already becoming increasingly leveraged. Indeed, they are progressively more focused on the future ability of manufacturers to meet their terms, so future cash flows are coming under the microscope.

We’re also seeing scenarios where a prolonged lack of investment is coming home to roost. For example, significant production outages – linked to antiquated equipment – are contributing to targets being missed while requiring substantial and unplanned capital expenditure to remedy. In this regard, the government’s announcement in the Autumn Statement that the ‘full expensing’ capital allowance will be made permanent may help for some manufacturers looking to upgrade machinery and equipment, both now and in the future – although will likely only be a benefit for those that have the headroom to invest in the first place.

The results of the report highlight that while manufacturers are continuing to face challenging conditions, a healthy proportion are keen to invest in growth, which speaks strongly of the sector’s innovative and entrepreneurial outlook.

For further analysis, click below to read our new report in full:

Against the odds: The future of UK manufacturing