Aiming for flexible finance models
13 December 2016
OEMs are leading the way in the manufacturing supply chain with asset finance, says Brian Foster, head of Industry Finance at Siemens Financial Services in the UK.
Manufacturers are reporting a growing need for investment in new-generation technology to enable them to capitalise on the benefits and counter the challenges of Industry 4.0 including the drive towards increased operational efficiency, increased production capacity, greater flexibility and more competitive pricing. This is good news for OEMs, as rising demand at any point along the supply chain can provide opportunities for higher sales and profit.
Investment in new-generation production technology has an important role on the agenda of manufacturers. A recent Siemens survey a large majority of manufacturing businesses in the UK, for example, found that 83% said they had made investments in the automation of production processes in the past five years.
Financial considerations were often cited as the reason where such investments have been deferred. More than half (54%) of manufacturers who have not automated in the past 12 months fear that the return on investment period of the new equipment would be too long. Similarly, Hennik Research, Annual Manufacturing Report 2016 found that just under one-third lack the necessary investment budget and are concerned about ongoing costs.
Additionally, according to the Royal Academy of Engineering businesses in the sector in the UK still perceive bank lending conditions to be restrictive and therefore bank loans are not seen as a suitable source of finance. Manufacturers are therefore increasingly looking to diversify their funding options and gain access to flexible and transparent finance for their investment endeavours.
Asset finance solutions, such as leasing and rental-based options, have a number of advantages over conventional loans. These financing arrangements offer the option to spread the costs of the equipment over a pre-agreed period removing the need for large upfront payment. As the finance facility is secured wholly or largely on the asset being financed, the need for additional collateral is reduced. The lease cannot be recalled during the life of the agreement which provides increased peace of mind for the user. Additionally, asset finance offers flexibility because businesses have the option to add on, replace or update equipment during or at the end of the lease period. For OEMs engaged in the manufacturer of machinery could also leverage these benefits to drive sales by integrating asset finance into their overall offering helping their clients invest in new technology.
A flexible programme
An example of a flexible vendor finance programme is the arrangement between machine manufacturer TRAKRAP and Siemens Financial Services (SFS). The producer of energy efficient packaging solutions for the retail sector developed a patented wrapping system that uses 90% less energy and 70% less wrapping film than traditional shrink wrapping by removing the requirement for heat tunnels. As demand for the solution was growing the company wanted to access a suitable form of finance that would help its cash flow and improve its customer proposition by providing clients with an attractive financing solution. The manufacturer was introduced to SFS by its technology partner Siemens Digital Factory. SFS was able to offer a forward-thinking vendor financing solution. Under the agreement SFS pays TRAKRAP for the equipment and leases it to the end customer, enabling costs for the use of the system to be spread over the contractual period on a ‘pay per wrap’ basis. The lease costs are offset by the savings made through the use of the equipment.
For TRAKRAP, their vendor financing programme with SFS enables the company to discuss financing with their clients right from the start. The ‘cost per use’ lease has proven an important sales tool as TRAKRAP can now offer its wrapping technology to a much broader customer base. Its clients appreciate the ease, transparency and flexibility of the financing solution. The ‘cost per wrap’ arrangement allows for a reliable assessment of expected savings for the end client and delivers a strong business case for the investment. Without the need to buy and own the equipment the customer benefits from the use of the system without a large upfront capital expenditure. Additionally, TRAKRAP receives the payment for the machine at the outset of the lease, so can continue to grow its business.
Working together with specialist financiers can help OEMs offer the added convenience of a viable financing solution while focussing on their core business of providing advanced technology solutions. In this way, they can set their products and services apart from the competition, give their clients a compelling reason to buy, and enable them to buy today instead of delaying their purchase.
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