Financing for manufacturing and engineering: the asset-backed routes

You have a shopfloor, a set of machines with serial numbers, raw material in the store, part-finished work on the line and invoices out to customers who pay on their own terms. Every one of those is a place where money is sitting still. It is also, from a bank’s point of view, a place where something can be secured, valued or tied to a document. That is why manufacturing and engineering companies usually have more financing routes open to them than a services business of the same size, and why a manufacturer who gets declined for a clean working capital limit has not necessarily run out of options.

Why asset-backed lending is available when unsecured is not

An unsecured facility asks a bank to rely on your trading record alone. If the record is short, uneven or the accounts are weak, the answer is usually no, and it may well be the right answer. Our note on why banks decline SME applications covers the usual causes.

Asset-backed lending asks a different question. Not only can this business repay, but what does the bank hold if it cannot. When there is a machine with a resale market, a factory with a title, imported goods with shipping documents or an invoice to a creditworthy buyer, the bank has a second way out. That changes the risk, and it often changes the answer. It also changes the shape of what you are offered: a series of facilities each tied to something specific, rather than one general limit.

Machinery and equipment financing

Equipment is funded in Malaysia through hire purchase, leasing, or a term loan with a charge over the machine, and the differences matter.

• Hire purchase. The financier owns the machine until the final instalment. Documentation is quick, the asset itself is the main security, and the facility is usually the easiest of the three to obtain.
• Leasing. You pay for use over a term and hand back or buy at the end. It suits equipment that dates quickly and keeps the asset off your own purchase ledger, though it leaves you with nothing at the end unless you exercise the option.
• Term loan with a charge. More flexible on structure, more paperwork, and normally used where the equipment is part of a larger project.

The margin of finance varies with what you are buying. A new machine from an authorised local distributor, with a warranty and a service agent in Malaysia, attracts the highest margin. A used machine attracts less, and an imported used machine with no local agent less again, because the bank is weighing what it could realise and how easily. Banks generally publish the margin of finance each offers on new and used equipment, and the gap between the two categories is wider than most buyers expect. Equipment financing sets out the mechanics.

How banks value used and specialised machinery

Here is the part that surprises engineers. The more specialised a machine is to your process, the less it is usually worth as security.

A bank is not valuing the machine’s usefulness to you. It is valuing what a plant and machinery valuer thinks it would fetch, in a forced sale, from someone who is not you. A generic CNC lathe, a standard injection moulding machine, a common press brake or a forklift all have a secondary market with buyers and a price history. A bespoke line built to produce one customer’s part, or a machine with a control system nobody else in the country services, may have a forced sale value close to its scrap value.

What the valuer and the bank look at:

• Whether an active second-hand market exists in Malaysia or regionally for that make and model
• Age, hours run and maintenance records, and whether the machine is still supported by the manufacturer
• Whether it can be removed without dismantling the building, and what removal would cost
• Whether it is fixed to the premises, which can complicate the charge if the land belongs to someone else
• Import documentation and proof of ownership, particularly for second-hand imports

None of this makes a specialised machine unfinanceable. It means the case has to rest more on the trading and the contracted demand than on the security, so bring the order book rather than the specification sheet.

The working capital cycle, stage by stage

A manufacturer’s cash sits in four places at once, and each stage has a different funding answer.

Work in progress is where applications usually come apart. It is the stage with no document attached: no shipping set, no invoice, nothing a bank can tie a drawdown to. Most banks fund it through the general limit and size that limit off the trade cycle, so an accurate picture of your stock days, work in progress days, debtor days and creditor days is worth more in the application than any narrative. The calculation is set out in how working capital financing works, and the receivables end in invoice financing explained.

Imports, exports and where trade financing fits

If you buy raw material abroad, trade lines are usually cheaper and easier to obtain than a general limit, because each drawdown is matched to a document and the bank can see exactly what it funded and when the money should come back.

The common instruments are a letter of credit, which gives your supplier the bank’s undertaking rather than yours; a trust receipt, which funds the gap between paying for the goods and selling them; and a bankers acceptance, a short-term bill used to fund either a purchase or a sale. Exporters can also look at export credit refinancing administered through EXIM Bank, which funds orders before shipment and receivables afterwards. Where you buy and sell in different currencies, ask about forward contracts at the same time you ask about the line, because an unhedged position can remove a year’s margin. Trade financing covers the instruments in more detail.

The factory: financing a property is not financing the business

Owning your premises changes what a bank can do for you, but it is worth separating two different transactions that often get confused.

A factory purchase is a property loan. It is assessed on the property first, through a valuation, the title, the category of land use and the express conditions, whether it is freehold or leasehold, and whether a certificate of completion and compliance exists. On leasehold industrial land the consent of the state authority is normally needed before a charge can be registered, and that consent takes time which the application timetable has to allow for.

Financing the business is assessed on trading, and the factory is relevant only as security. The practical point is that these two compete. A manufacturer who funds the factory purchase at the maximum margin, on the longest tenure, has used up the security capacity that could have supported trade lines and a working capital limit. It is usually better to decide the total facility structure first and then allocate the property within it, rather than buying the factory and discovering afterwards that nothing is left to secure the lines the business actually runs on. Where security genuinely falls short, a Credit Guarantee Corporation guarantee can cover part of the gap.

The expansion case a bank actually wants

Most capacity expansion applications are built on a market. The market is growing, demand is strong, competitors are busy. Banks have read that paper many times and it does not move them, because a market cannot be repossessed.

What moves a credit committee is contracted demand. A confirmed order book, purchase orders in hand, a framework or supply agreement with stated volumes, or a letter of award from a customer the bank has heard of. The strongest version of this case has four parts:

1. The constraint is real and measured. Current utilisation by machine or line, showing you are at or near capacity rather than asserting it.
2. The demand is contracted, not forecast. Orders, agreements or letters of award, with volumes and terms, and an honest note on customer concentration if one buyer accounts for most of it.
3. The new capacity matches the demand. The machine’s output tied to the specific volume it is being bought to serve, with the commissioning timeline and who will operate it.
4. The repayment comes from the new work. Contribution from the additional volume set against the instalment, with enough margin that a delay in commissioning does not break the schedule.

Manufacturers are also the sector most likely to be eligible for the government grants and matched funding that sit alongside bank facilities, and the two are frequently used together. Grants and financing sets out where each fits.

SMEBox reviews a manufacturer’s position, works out which of these routes the business can realistically support, then prepares and submits the application to the lenders that fit. The bank decides.

Common questions

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