Manufacturing Loans – Six Financing Options

Manufacturing companies tend to be resource-intensive business. They often require financing at some point. Generally, manufacturing companies need funds to:

  • Fulfill new purchase orders
  • Pay bills
  • Cover payroll
  • Buy materials
  • Purchase machinery and equipment
  • Acquire real estate

However, a business loan is not your only option. In fact, it may not usually be your best option. Instead, focus on finding the right financing solution to solve your specific problem.

In this article, we provide six financing options for solving different financial problems.

Option #1: Business Cash Advance

Business cash advances – also called merchant cash advances – have been gaining popularity in recent years. They can be used to finance many businesses and are offered to manufacturing companies, restaurants, private practices, car mechanics, and hair salons.

This product provides funding relatively quickly – often in days. Companies that provide this product require substantially less information than a bank. Therefore, qualifying is very easy.

However, there is one catch. Business cash advances are very expensive. Using them incorrectly can lead to liquidity problems.

Whether these advances are technically a loan – or the sales of future revenues – is still a matter of legal debate. However, their structure resembles that of a term loan with periodic payments.

Once you qualify, the funds are wired to your company. From that point forward, you start repaying the loan through daily or weekly withdrawals from your bank account. Learn more about how they work (and their cost) as well as their pros and cons.

Option #2: SBA Financing

Let’s first clarify something. The Small Business Administration does not make loans or provide lines of credit. It provides guarantees to lending institutions. In turn, the guarantees allow institutions to reduce the risk of making certain loans and lines of credit. This detail is very important. You still must submit an application through a lender.

SBA-backed products are great. They offer very affordable terms to manufacturing companies that could not get them elsewhere. The application process is thorough and has a number of requirements. It also takes time. Realistically, assume the application process will take a couple of months.

If you need a loan for less than $25,000, consider an SBA Microloan. Otherwise, consider their other solutions. Find more information here.

Option #3: Supplier Financing

Supplier financing is a form of supply chain financing. It helps manufacturing companies finance the raw materials they need for production. This funding enables them to fulfill large orders or build inventory.

Supplier financing works by having a finance company intermediate your raw material purchases. The finance company buys materials from your supply chain on your behalf. Then they extend credit to your company and resell the product to you. Your company has up to 90 days to pay the invoice.

Supplier financing does not create debt. Instead, it creates a trade payable. It can be used alongside most other types of financing. Also, it usually won’t interfere with your lending covenants (please check with your lender).

To qualify, companies must have:

  • Three years of operation
  • Yearly sales of 2 million dollars or more
  • The ability to get credit-insured
  • Adequate financial statements.

Option #4: Asset-Based Lending

Asset-based lending provides financing to midsize manufacturing companies. It allows manufacturers to finance their inventory, accounts receivable, machinery, and other assets.

The line is structured based on the assets that are being funded. Lines based on accounts receivable and inventory are structured to resemble a revolving line of credit. They allow you to get funds and repay based on availability.

Lines based on machinery and other assets resemble term loans. Your company gets a set amount, which is paid back in installments.

Asset-based loans are considered an intermediate product. They are cheaper than factoring (option #5). However, they are more expensive than bank financing.

Note that all the asset-based loans we finance must include an accounts receivable component. Learn more about asset-based loans.

Option #5: Factoring

Accounts receivable factoring is a solution that allows you to finance your slow-paying invoices. It is used by manufacturing companies that cannot afford to wait 30 to 60 days to get paid by clients.

Invoices are usually financed in two installments. The first installment covers up to 85% of the invoice. It is paid as soon as the product is delivered to the client. The remaining 15%, less a small fee, is paid once your client pays the invoice in full.

Factoring is easier to get than most financing products. The main requirement is to work with creditworthy commercial clients. Aside from that, your invoices cannot be encumbered by any liens.

Learn more about factoring, how it works, and its pros and cons.

Option #6: Inventory Financing

Inventory financing enables manufacturing companies to leverage their excess inventory. It provides companies with funds which can be used to pay for expenses.

Inventory financing is generally very expensive compared to other options. It’s best used once other alternatives, such as asset-based loans or factoring, have been exhausted.

Inventory can be financed at 50% to 80% of the appraised value. However, inventory is not appraised at market value. Instead, companies appraise inventory using one of two methods.

The two appraisal methods are the Net Orderly Liquidation Value (OLV) or the Forced Liquidation Value (FLV). Note that the valuation yielded by these methods is often below market value. Learn more about inventory financing.

Does your manufacturing company need financing?

We are a leading provider of factoring, supplier financing, and asset-based loans. For an instant quote, fill out this form.