Features

As the credit crunch enters its second year, it has so far been something of a phoney war. Like the first year of World War II, it has seemed the action has mainly existed only in the media, fought on distant shores with little recourse to most people’s daily lives. In the Second World War, the rude awakening as to the reality of modern warfare came with the Blitz and now the first bombs are beginning to fall on the UK economy.

For the print industry, the credit crunch could spiral into a vicious circle. By reaching their debt limits, companies’ ability to expand through borrowing and consumer spending have been restricted. At the same time, falling consumer confidence, fuelled by the restriction of personal debt, stems purchasing power, advertising spend by companies exposed to the consumer markets and consequently, print revenues, which increases companies’ credit risk and the cost of finance.

Murray Booker, who recently founded BPFL, a print-focused finance broker, says it is becoming harder and harder to get finance. The market is moving to a risk-based pricing system, he says. Someone with strong credit worthiness would have been largely unaffected by the credit crunch so far. However, it is those with weaker credit ratings that are being hit by rising interest costs and lack of availability of finance. It is more important than ever to shop around to find the right deal.

He says that by approaching a broker with a deep knowledge of the market, a printer can find the best deal for their needs. However, Booker adds that it is getting more difficult to find lenders that are willing to lend to the print industry and those lenders who currently do are becoming more risk averse in line with the overall market trend.

Having said all that, there is still finance available for printers, according to David Bunker, business development director at Close Print Finance. He says that despite the challenges the industry is facing there are still lenders who are willing to lend to the right business.

The print finance market still offers a wide range of customer types from very strong, not so strong and more challenging businesses, he explains. Companies’ level of debt – such as a loans, overdraft, hire purchase agreement or factoring contract – compared to their net assets tends to be higher-than-average in the print industry.

This has always been a turn-off for high-street banks and where a specialised merchant bank, such as ourselves, have stuck with it. The reduced trading opportunities that many print-related businesses have experienced hasn’t helped with this problem, so it’s down to banks that understand the printing industry to provide support.

Booker agrees saying that many lenders’ models are at odds with the reality of print finance. Lenders often say that they are happy to lend, but will only do so below certain levels of gearing [the ratio of financial debt to shareholders’ equity] but printers tend to put the cart before the horse and the investment is needed to expand the business and realise the additional revenue.

Debt or equity?
Financially, the print and paper industries have been through a tough time lately. At the time of writing, almost 800 job cuts have been announced in the past three weeks. Some have laid the blame at the feet of risk-averse lenders. The managing director of Curtis Fine Papers said last week that when its asset-based lender called in a loan, he had no option but to put the company into administration.

There is no doubt that bloated overdrafts and over-extended loans are one of the key reasons for the demise of many companies, but without debt, most companies would never have been able to break out of the shell and compete on a local or national level.

Debt, therefore, is rather like alcohol. In small and controlled quantities it can form a vital part of healthy and profitable business. However, take on too much and you can soon find yourself battling against it, plunged into addiction where imbibing more can be your only route out of the troubles it has caused.

As Nicholas Mockett of private equity house Europa Partners explains: Almost every company’s balance sheet should have an element of debt. Despite the credit crunch, debt is often cheaper to come by than equity. There is no one-size-fits-all rule to how much debt a company can carry. Each company should have an honest and detailed plan based in order to ascertain how much debt they can safely take on.

Choosing the right debt package is almost as important as the level of debt that is taken on. And with thousands of different products in the market, printers could be forgiven for feeling all at sea when it comes to understanding the market and finding the right package for each particular growth target or business.

For printers, a simple debt package such as an overdraft is increasingly becoming a more expensive and risky option. The principal impact of the credit crunch has been on risk appetite among lenders and, as a result, the cost and availability of finance.

Asset-based lending
In the years of plenty, when interest rates were low and the streets of the City were awash with liquidity, banks would be willing to take more speculative bets on businesses and low interest rates enabled companies to take on more debt. But now printers are increasingly finding their overdrafts cut and interest rates shooting up, thus further squeezing margins.

As a result, it is no surprise to see finance packages lent against order books, or assets, rising in popularity. Kate Sharpe is the chief executive of the Asset Based Finance Association (ABFA), the trade association representing asset-based lenders and the factoring and invoice discounting industry. She says that asset-based lending is well placed in the current climate and anticipates rapid growth. Asset-based lending has soared over the past five years. With the onset of the credit crunch banks are being more careful and lending against assets provides a safer investment, she says.

For borrowers, safer means cheaper and asset-based lending is both an attractive investment package for financing growth through the mortgage of an existing press or acquiring a new machine without having to take out an expensive bank loan. As the industry grows it is also evolving. Until recently the ABFA was called the FDA: the Factoring and Discounting Association. Its name change reflects not only the growth of asset-based finance, but also the widening definition of an asset.

Asset-based lending would traditionally have meant lending against an printing asset, explains Booker. Increasingly, however, lenders are packaging services and looking to offer a broader package to their clients. So, a bank will lend against an asset but also look to offer invoice discounting as well. The upside to this is that you will probably get a better deal as the lender will not be exposed to one aspect of the business. On the other hand the disadvantage is that all finance is tied up with one lender.

Nigel Wallbank recently set up Think Colour, a start up short-run litho business. He had been in discussions with one lender but was uncomfortable with the level of security that it required to lend against and so turned to BPFL for assistance. The broker set him up with State Securities whose competitive asset-based lending deal enabled him to buy a Heidelberg SM 52-4+L Anicolour, a Suprasetter A52 CTP, and a Polar 78X guillotine and set up shop. Not having to deal directly with the banks saved me a lot of time, he explains. I was able to tell BPFL what I was hoping to do and the team sourced a suitable deal. State also secured a small-firms loan for us which helped.

Another finance option available is to take out an operating lease. Through an operating lease, the lessee can acquire the use of equipment for a shorter term than the useful life of the asset. Additional services such as maintenance and insurance may also be provided by the lessor. Under the terms of an operating lease, the lessor leases the asset for a fixed monthly amount. As the lease is classified as a ‘true lease’ the debt will not be on the borrower’s balance sheet. Booker says that it can be an attractive option for a press purchase but that such deals are increasingly hard to come by.

According to Booker, hire purchase (HP) remains the preferred method of financing a business. With hire purchase, the goods are not owned by the debtor until the balance is paid off, which removes some flexibility, but considering most investments by printers are long-term investments such as press purchases, this should not create a real problem.

One possible disadvantage of HP is that, if the debtor falls behind with payments, the asset can immediately be seized by the creditor. With other credit agreements this is not the case. However, if a third of the outstanding balance has been paid, lenders must go to court to seize the asset.

The right finance package
To attract any level of financing, however, companies have to present their business in a way that is attractive to the lender. As Booker notes, a risk-based pricing system is becoming an increasingly central factor in any decision to lend. As such, minimising the perceived risk will not only make a lender more likely to lend, it will also be cheaper to borrow the funds.

Bunker says that being realistic is key to attracting the right finance package. Don’t try and purchase an asset that is too ambitious – a bank may feel there is too much hope value, he advises. Be prepared for directors’ guarantees (albeit limited ones are sometimes negotiable) and offer unencumbered assets to support the deal. In addition, a business plan with cash flow, profit and loss and balance sheets will help with larger investments. A period of consolidation never hurts as long as opportunities aren’t carelessly missed.

The economic climate is likely to get worse before it gets better. However, the key message coming from the market is that funds are still available for the right business with the right proposition. Debt should be embraced as part of any growth plan, but getting the right level of gearing and the right finance package is more important than ever as the bombs start falling.

RAISING FINANCE – THE OPTIONS

There are hundreds of different products offered by lenders to companies looking to raise finance, but here are a few of the prominent agreements that printers will come across when looking to raise funds

Hire purchase
Agreement whereby the asset is taken home instantly and the balance is repaid over a set period, a deposit is normally paid upon signing the contract

Invoice discounting
Funds are lent against a company’s outstanding invoices in return for a fee payable to the lender. Good for start-ups to generate cash flow but can run into trouble if payment terms are breeched by the company’s creditor

Operating lease
Usually a short-term lease where the lessor assumes the responsibility and cost associated with maintenance and insurance. Hard to come by in the current economic climate

Sale and leaseback
An agreement which sees the owner of an asset sell it for an agreed sum and takes back a lease on it from the purchaser. Useful to raise funds but sells off the asset.