Increase in defence spending will create significant opportunities for manufacturers across the supply chain, but if the orders arrive will they be prepared to meet them? John Harrison, head of relationship management at Allica Bank, shares his advice and explains why access to finance will be essential.
Britain’s manufacturers have spent years dealing with uncertainty and underinvestment. Now, however, increased defence spending could present a very different challenge – whether they have the capacity to capitalise on stronger demand.
UK aerospace, automotive and machinery manufacturers in particular could have a key role to play across the supply chain. But while there is optimism among the manufacturing businesses I speak to, if the orders arrive, are they prepared to meet them?
Growth often requires investment before the revenue follows – whether in machinery, raw materials or people. That means fuller order books can bring greater working capital pressures, making access to finance just as important as the demand itself.
Confronting the lending gap
This matters particularly for established manufacturers. These businesses, which typically have between five and 250 employees, account for just 36% of British manufacturing firms, according to an Oxford Economics report, but support nearly half of all manufacturing jobs. Their ability to invest in equipment, skills and productivity matters well beyond the individual businesses involved – it’s vital for the sector as a whole.
Yet, underinvestment in the sector is a long-standing issue, and firms have struggled to access the funding they need to invest and grow.
Recent research undertaken by Allica revealed that business lending in the UK has collapsed over the last thirty years against its long-term trend, contributing to an SME lending gap of £65 billion. As a result, this has left the UK with the lowest rates of business investment in the G7.
That creates a tension for manufacturers today. While there could be a significant opportunity ahead, including from increased defence spending, businesses emerging from a prolonged period of underinvestment may need to increase their capacity before they can take advantage of it. Winning the work is only one part of the equation. Manufacturers also need the people, equipment and working capital to deliver it.
Don’t treat one ‘no’ as the whole market
The lending gap has understandably left many of the manufacturers I speak to cautious about investing. There are lenders enthusiastic about helping businesses grow, and the key is shopping around to find the right one.
As many as 75% of business owners only approach one lender. If that lender says no, there is a risk they treat that decision as a verdict from the whole market and either scale back their plans or abandon the investment altogether.
This means they often bypass those more willing to back their growth ambitions, with around 60% of business lending in the UK now coming from challenger banks. Different lenders have different appetites, sector expertise and approaches to assessing risk, so the bank a manufacturer has traditionally used may not necessarily be the one best placed to finance its next stage of growth.
Prepare before opportunity strikes
One of the key pieces of advice I share with the businesses I work with is really simple: Don’t wait for the order to land before working out how you will deliver it.
Cash flow management is one of the biggest issues facing manufacturers trying to grow. For example, a manufacturer that wins a significant new contract may suddenly need to purchase more raw materials or invest in new machinery. And the bigger the opportunity, the greater that pressure can become.
I see this regularly in the manufacturing businesses I work with. Often, the answer isn’t simply taking out a new loan. It can mean looking at how a business could use the value tied up in existing assets, how its cash and savings are working for it, or what additional working capital it might need to support a larger order book. Understanding those options – and putting the right facilities in place early – can give a business much more confidence when an opportunity does arrive.
That’s why manufacturers should now be thinking about what stronger demand would mean for their business. Where are the capacity constraints? What equipment would they need? Could existing assets help unlock investment? How much additional working capital would a larger order book require?
These are much easier questions to answer before an opportunity arrives than when a new customer is waiting for an answer.
Looking ahead
The prospect of increased demand presents a significant opportunity for manufacturing businesses across the supply chain, but it will be the ones that get ahead and invest in innovation and productivity now who will really thrive.
Manufacturers that wait until a major order lands before thinking about how they will finance it may already be behind. Those best placed to benefit will be the ones planning their capacity – and the capital required to support it – now.
Whilst that funding has been historically hard to come by for manufacturers, established businesses actually have far more options than they realise. They just need to know where to look.
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