The banks are right not to lend to some UK plant hire companies, according to market report publisher Plimsoll Publishing.
Having recently surveyed the returns from 1,000 companies in the sector, senior analyst David Pattison, found that more than 600 had profit margins of less than 1.5 per cent, and 452 made a loss.
“High profile failures in other sector like travel and construction show the danger of operating on micro profit margins and the same thing could be heading to the plant hire industry in 2011,” he says. Even plant owners with minimal or no debt are struggling to get credit if they have thin profit margins, as the banks deem them too risky for a loan.
Mr Pattison says: “Many companies are turning up at the bank saying ‘we spend almost as much (or even more) than we make, please can we borrow some money?’ and nobody can blame the banks for refusing credit to companies that might not be able to pay it back.”
However Plimsoll identified almost 200 prudent companies that have focused on the bottom line instead of chasing sales over the last few years. “These companies now have the edge in the market and are the ones the banks are most willing to lend to,” says Mr Pattison.
Risks with approaching banks
JCB Finance’s Nigel Greenaway, goes a step further and says approaching your bank for a new loan to buy plant may prompt a review of the company’s trading performance, and lead to the bank withdrawing existing overdraft facilities which could place even greater strain on a company’s cash flow. Mr Greenaway says it would be better for plant owners to seek finance from a dedicated plant finance company such as those associated with the machine manufacturers, because these companies take a different view from the banks.
“If a plant-owning company can put up a deposit, say by trading in an older machine, specialist finance companies will usually be prepared to finance plant purchases because that deal will be seen as ‘asset secure’ as the machine is worth more than the customer owes,” he says.
This means that under a typical hire purchase agreement, the finance company will have the right to re-posses the plant in the event that the plant owner cannot keep up the repayments. However such a move would be a last resort and not affect the plant owner’s working capital or other banking facilities, says Mr Greenaway.