The success of your engineering business often comes down to getting the right funding at the right time. Should you invest in sales or technology? Have you identified new products or new economic territories? What are your funding options and how should you be using them?
UK engineering firms are continually praised for their engineering excellence and there is a strong tradition to maintain. Current engineering feats like Crossrail, Leeds’ new £45m flood alleviation scheme, the new Forth road bridge and the Olympic Stadium show that British engineering ability is still as innovative today as it was in the time of Brunel.
But it isn’t without its difficulties and finding appropriate finance is often at the very heart of meaningful progression and innovation.
There is a real need for flexible finance to react to the changing market conditions, which includes the current uncertainty of an EU trade deal as well as the opening up of other overseas markets.
The Key Issues Within Engineering Companies
Assessing what funding means to your engineering business means understanding the key issues you may encounter.
Graduate skills shortage
One common theme stretching back to before the recession is the perceived lack of engineering talent, mainly the lack of suitable graduates. But the real problem is the uneven job market.
Big companies, like Airbus or BAE Systems, have too many candidates, whereas the majority of SMEs fail to see the same kind of volume of graduates applying for roles. It can make for an unbalanced scenario given the wider industry implications of skill shortages.
For example, if you are a small engineering company in a rural location, how easy is it to attract enough applicants for positions? And can you afford to pay the wages offered by the big engineering players?
Brexit, the EU, and overseas markets
Brexit could afford Britain’s engineering sector an opportunity to re-establish its position at the forefront of global engineering. But, and this is a big but, everything hinges on a speedy trade deal process. Whether it is a good or bad trade deal, it is important for UK engineering businesses to establish where they stand quickly.
On the one hand, when the free trade between the UK and EU is no longer present, the costs of supplies and materials are likely to increase. On the other hand, it also opens up the worldwide market.
No one can quite agree what the result of leaving the EU will be, but there is certainly a big fear that export costs (in the guise of tariffs) will rise. Alongside this is a dwindling EU talent pool.
Clearly, if UK engineering businesses don’t set aside a certain amount of time and funding to seek newer markets, they will be left lagging behind their EU counterparts.
Reducing energy use
The consumption of fossil fuels and the need to reduce energy use is one of the biggest challenges for engineering firms large and small in the UK. With climate change agreements getting more stringent, it is even more important to create more innovative and effective energy-saving systems. The irony is that developing cleaner technology and engineering processes don’t come cheap.
Funding Options For Engineering
Most engineering companies will need to raise money somewhere along the line, whether it is to promote growth, consolidate market position or compete in a worldwide marketplace.
Seeking finance usually means the first call is to the bank, but increasingly that first call is also to an alternative lender. Both have beneficial products aimed at giving much-needed boosts in cash flow for engineering businesses.
With low-interest rates (which are set to stay low), business loans are popular. But so too is longer-term investment capital, asset finance, and short-term bridging loans. Each provides a unique way cash investment opportunity that can be used by growing businesses.
Take a closer look at a few finance options available for engineering companies:
- Unsecured business loans
Unsecured business loans are the fastest growing form of finance available, and are a financial model banks are ‘borrowing’ from the alternative lending industry.
This type of finance is perfect for engineering companies who are looking to expand. For example, if your newly formed company executes their growth strategy faster than anticipated, it can leave you in need of a larger premise and more machinery to facilitate new business. Traditional banks may turn down an application from your company because of a limiting trading history.
In this situation, an unsecured business loan from an alternative finance provider can provide the funding solution, as terms and conditions are more flexible than traditional lending institutes.
- Equity finance
Engineering companies can raise money through the sale of shares using equity finance. This can be done in exchange for both mentoring, leadership, or a seat on your board, and is an increasingly useful method for those engineering businesses that are at the forefront of electronic and AI technologies.
This isn’t just the domain of big corporate entities either but is being widely adopted by many small and medium-sized companies too.
Whereas banks offer little or no flexibility when it comes to offering funding, equity exchange can be made with suitable repayment plans alongside a high level of input from mentors. This helps them become both sustainable sources of funding as well as being invaluable business tools.
Equity investors always provide funding in return for a stake in the business. They take a calculated risk on the engineering business’s future which itself gains from the shared success of this financial cooperation and guidance. Their involvement also advocates the wider confidence in an ability to build a stronger, more valuable looking business.
No one pays their rent years upfront, so why do many businesses do exactly that for their engineering equipment?
Whatever area of the engineering sector your company occupies, there is going to be an asset-based finance solution available to cover your plant, as well as the technical and research equipment you need to succeed.
Equipment for engineering firms is expensive, especially when bespoke items are required. This is often viewed as a major hindrance, limiting the progression of many smaller businesses looking to grow and compete because they simply cannot afford the upfront costs.
Even if the necessary equipment is affordable, using asset finance frees up a valuable cash sum that can be spent on other important aspects of the business like developing cleaner technology, purchasing materials or employing the right staff.
There are three ways in which you can benefit from asset finance:
1. Budgeting - Financing your equipment allows for greater control over monthly and annual expenditure, easing cash flow through your business.
2. Tax efficiency - Equipment leasing is more tax efficient than buying outright. When an item is leased it becomes a monthly expense rather than an asset where tax can be applied to your balance sheet at the end of the year.
3. Scalable - Asset finance is a scalable form of finance, meaning your equipment and plant repayments only grow when your business is good and ready.
Other methods of asset finance include hire purchase and engineering equipment finance.
The use of bridging loans has become standard for many businesses looking to purchase or renovate a premise. They can also be used in conjunction with other forms of finance.
For any engineering company purchasing new equipment, large-scale material or recruiting a specialist engineering team to deliver on a project, applying for an unsecured loan or even getting equity finance might not always be enough.
A bridging loan can add the capital required to tie all your processes and capital outgoings together (or just provide that essential cash flow) prior to seeing the financial return of that new project.
So, how does a bridging loan work?
When acquiring an asset, bridging finance can be used to help you complete the purchase. There are multiple reasons why the completion of the sale could be delayed on heavy engineering equipment from changes to loan agreements or payment delays.
A bridging loan helps by providing quick access to cash with flexible interest payments due monthly or rolled into one single end of term payment.
Do You Know Which Funding Option Is Right For Your Engineering Business?
In engineering, like many other rapidly moving industries, staying one step ahead of the competition means getting the right funding.
The best finance option for your business or project could be through efficient usage of short-term unsecured business loans where you can mitigate skill-shortages or the purchase of expensive equipment and materials. Or, it could be through equity finance which often arrives with top-level strategic or management support.
Whether you prefer unsecured loans, equity finance, bridging loans or asset finance, there is no set right or wrong way of introducing those funding options into your engineering company.
You’ll find that growth works best when a combination of funding methods are employed.