Manufacturing companies have very dynamic financing needs. However, when they need financing, managers often resort to conventional loans. While they can solve many problems, manufacturing business loans are not always the best solution.
No single financial product can always be used effectively in every situation. Instead, the financing you use depends on the situation you are facing. In this article, we discuss four common business financing scenarios, along with financing alternatives:
- Business acquisition
- Large orders or building inventory
- Payroll and supplier expenses
- Machinery and equipment
Scenario 1: Business acquisition
Business acquisitions are one way to grow your manufacturing business quickly. The strategy is simple: acquire businesses that complement your current growth strategy.
Most small to midsize business acquisitions are executed using a leveraged buyout. This method finances the acquisition by leveraging the combined assets of the businesses.
Business acquisitions must be carefully planned and executed. If done incorrectly, they can leave the company saddled with debt. This strategy can also be dangerous: if the company cannot meet its obligations, it could default, and, ultimately, fail.
Potential Solutions: Some acquisitions require a conventional business loan while others may be done with an asset-based loan.
Most small and midsized acquisitions are financed using an SBA-backed loan. SBA-backed loans are easier to get than regular loans. They are popular because they provide favorable terms to the borrower.
Getting the loan may take a couple of months, as the application process is extensive. First and foremost, you must show that the loan can be repaid from the cash flow of the business. Additionally, you must show collateral, provide financial disclosures, and contribute a down payment (10% approximately).
In some cases, you can acquire a business using an asset-based loan. This approach works only at certain valuations. Asset-based loans can be used to leverage receivables, machinery, equipment, inventory, and real-estate.
Most acquisitions usually involve seller financing as well. Sellers can usually provide attractive terms. Furthermore, linking future performance with payments can ensure a more favorable transaction.
Scenario 2: Handling large orders or building inventory
A common problem for manufacturing companies is outgrowing their supplier credit terms. This situation leaves them unable to buy the needed materials to fulfill growing orders or build inventory.
Potential Solutions: The best tools for this problem are lines of credit and supplier financing.
The benefit of a business line of credit is straightforward. The extra funds availability allows you to buy goods from suppliers. Lines of credit are flexible and can be deployed when needed. However, they can be difficult to get due to their qualification requirements.
A second alternative is supplier financing. This solution extends your ability to buy on credit terms. It works by partnering with a finance company that intermediates your supplier purchases. The finance company buys goods from your supplier. Then they resell the goods to your company on 90-day credit terms. This funding gives you the raw materials you need. Learn more about how supplier financing works and its qualification criteria.
Scenario 3: Covering payroll and supplier expenses
Covering ongoing expenses can be difficult for growing manufacturing companies. Cash is often tied to inventory and invoices that are payable in 30 to 60 days. This scenario can make it difficult to pay employees or suppliers on time.
Missing payments can have serious consequences for the business. The most serious problem is missing payroll. The effects are immediate. Employee resentment grows and productivity drops.
Missing or delaying supplier payments also has consequences. It can erode your supplier’s trust. In turn, they can restrict credit or refuse to work with you.
Potential Solutions: The best tools for this problem are lines of credit, invoice factoring, and asset-based loans.
As noted in the previous section, the benefit of a business line of credit is straightforward. The availability of extra funds allows you to cover expenses and avoid problems. Lines of credit are flexible and can used as needed. However, they can be hard to obtain due to their qualification requirements.
A second option is to use accounts receivable factoring. Receivables factoring enables you to finance slow-paying invoices from creditworthy commercial clients. This solution improves your cash flow and provides funds for operations.
Invoices are financed in two installments. The first installment covers 80% to 85% of the receivable’s face value. It’s wired to your account once product is sold and an invoice is generated. The remaining 15% to 20% is wired to your account, less a small fee, once the invoice is paid in full.
For more information, learn about accounts receivables factoring.
A third alternative is to structure a receivables-based asset-based loan. This line operates as a hybrid between a line of credit and a factoring line. It is designed for midsize manufacturing companies. The main benefit of an asset-based loan over a factoring line is that it is cheaper and requires fewer controls. Learn more about asset-based loans.
Scenario 4: Acquiring machinery and equipment
Manufacturing companies have to acquire new machinery and equipment regularly. Due to their price, these purchases are usually financed. The tax and accounting treatment of the asset is important, as it varies based on the financing method.
Potential solutions: Your two options are to buy the machinery/equipment using a loan or to lease it.
The process to buy machinery/equipment with a loan is fairly standard. The loan requires a down payment, while the finance company finances the rest of the amount. The loan is paid in monthly installments until it is fulfilled. Once the loan is fulfilled, your company owns the asset outright.
At a minimum, the lender files a UCC lien to show the asset as collateral for the loan. It is not unusual for lenders to file security with the rest of your business assets as well. This step provides additional collateral to the lender. However, it can also prevent you from getting other financing without your lender’s approval.
The alternative is to lease the equipment through a leasing company. This option is easier to finance than a conventional loan. The leasing company buys the asset and then rents it to you for a monthly fee. Once your lease ends, you can return the asset or purchase it for a nominal amount.
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We offer business acquisition financing, asset-based loans, factoring, and supplier financing. For a callback, fill out this form. Otherwise, call (877) 300 3258.
Disclaimer: This article is written for informational purposes only. Please consult a financial expert before getting any type of funding.