Credit conditions improving for manufacturers

TORONTO—Good news for cash-strapped manufacturers: access to credit continues to improve.

The Bank of Canada’s latest survey of senior loan officers pointed to an overall easing in business lending conditions during the second quarter of 2012. The easing was most evident for small businesses and corporate borrowers.

It was the seventh consecutive quarter of easing for small companies, according to the report. Loan officers cited competition among lenders as the key factor driving the trend—an observation echoed by analysts.

“Markets are fairly good right now in terms of access to capital, due to the emergence of alternative lenders and B-credit lenders,” said Eric Castonguay, a partner with PricewaterhouseCoopers (PWC) Corporate Finance Inc. in Toronto.

“There was a point several years ago when it was very tough to access money to purchase equipment and capital goods because the credit markets were so tight. Now there is credit available to companies that aren’t quite investment grade.”

Despite concerns over the US economy, manufacturers with reasonable business prospects should be able to access credit, though they may pay a higher rate, he explained. The new entrants have also opened up more financing options.

“They tend to be smaller lenders and equipment finance providers,” he said. “They focus on small- to medium-sized enterprises. They’re fairly entrepreneurial and they basically carve out their niche by being flexible and responsive to companies that may not quite meet the lending requirements of the traditional banks.”

The new lenders are cropping up in response to growing demand from businesses as they green-light capital investments previously put on hold, Castonguay said.

A July 2012 survey by PwC showed 44 per cent of Canadian manufacturers are planning major new investments over the next 12 months. Sixty-three per cent plan to increase operational spending, according to the report, called the Canadian Manufacturing Barometer; Business Outlook Q2.

Leading areas for investment are information technology (40 per cent); new product or service introductions (37 per cent) and research and development (28 per cent).

“To be competitive on a global stage you certainly need to have world class productivity…and often, you need to invest in technology and equipment. So access to capital is fundamental for manufacturers to remain competitive,” said Castonguay.

The caveat of course, is to spend wisely. It’s one thing to get a line of credit or a lease, but manufacturers must ensure they get continuous value from the technology or equipment, added Calum Semple, a PricewaterhouseCoopers consulting leader working in mining and manufacturing.

“A number of times we see clients that have just spent a small fortune on a piece of equipment and it sits there broken down for days or weeks because they don’t have the right spare part and it’s getting flown in from Europe or they don’t have a technician to fit it,” Semple said.

He just finished a job with a client that had a third of its facility shut down for three weeks waiting for a part. “It’s just crazy and it’s bad planning.”

Semple suggested a critical asset analysis for any new major equipment. The analysis figures out what can cause the machine to shut down so plans can be made in advance for parts and service.

“So it’s not just about being a good time to invest,” Semple said. “Because if you don’t use the investment wisely then it won’t really matter what you buy.”

With the right preparation though, credit conditions are primed to connect manufacturers with the capital they need to expand and innovate as the industry shifts into growth mode.

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