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Manufacturing is a major propelling force in the American economy. According to the National Association of Manufacturers, every dollar spent on manufacturing puts an additional 89 cents back into the economy. And small business owners are a huge part of that contribution: three-quarters of manufacturing businesses have fewer than 20 employees. But all of that production costs money, which is why the right source of manufacturing business funding is essential.
Manufacturing loans are useful for many reasons: helping out with cash flow, especially when suppliers don’t pay on time; hiring new workers, especially during high seasons; and triaging those emergency moments when your vital equipment takes a nosedive.
We’ll walk you through the best options for manufacturing business funding, and how to choose which type of manufacturing business loan is the best for your situation.
Among the different types of small business funding available, several are suitable as manufacturing loans. With that in mind, the goal that you’re hoping to accomplish with your capital should be what guides you toward the best kind of manufacturing business funding for your business.
Remember that with each of these business loans you’ll encounter different requirements, including credit, collateral, and repayment terms.
Much of the efficiency of a manufacturing business comes down to your setup. If your hardware isn’t working, there’s a good chance that your business isn’t working, either. Say, for instance, that you’re a ciderhouse that does all of your production onsite. Perhaps your commercial apple press breaks, or your canning line stops… well, canning. Imagine how much this could hurt your business if you were out of commission!
Manufacturing equipment loans help remedy problems just like this one. With equipment financing, a lender will work with you directly to lend you capital to purchase the equipment you need. The loan’s amount and repayment terms are based on the equipment’s value. And although equipment can be something as big as a commercial cider press, it can be as small as the computer that automates it, too.
These loans are what’s called “self-secured,” which means that if you can’t pay your loan, the company will seize your equipment. Although that might sound frightening, it’s actually good news, because this collateralization lowers the bar to qualification.
The gold standard of business loans—even beyond manufacturing business funding—are SBA loans. These loans are provided by intermediary lenders, often small banks, and guaranteed up to 80% by the U.S. Small Business Administration. This government backing enables these lenders to drop their interest rates to the lowest on the market (generally).
As you might expect, however, their low rates and extremely generous repayment terms—we’re talking seven, 10, or 25 years depending on the SBA program—makes these among the most competitive loans available. That means that only the most creditworthy borrowers will qualify.
Technically, there is not minimum credit score requirement according to the SBA’s requirements. But we’ve seen that most borrowers who qualify for SBA 7(a) loans, the most popular and flexible type of SBA loan, have personal credit scores of 680 or higher. They’re also extremely paperwork-intensive, and the entire application-to-funding process can take weeks to complete. So if you’re in a rush to get your hands on a manufacturing loan, an SBA loan won’t be your best bet.
Like nearly all businesses that require inventory, manufacturing is a cash-intensive business. And if that cash is tied up in trade credit or overdue invoices, that can pose a big problem for all of the cash flow projections that you so diligently made.
Luckily, there’s a small business loan for that—and it’s called invoice financing (or accounts receivable financing). You work with a lender who fronts you about 85% of the total value of your outstanding invoices. When you’re paid, the lender releases the remaining portion, minus their fees. This is a stellar option for manufacturing businesses to free up cash flow, especially if it’s a matter of paying operating costs that’ll quite literally keep the lights on, or keep your workers on your lines.
The invoice financing process can happen in as little as a few days (if not a single day), so if you find you’re in need of quick cash, this could be an excellent manufacturing business loan.
Often, manufacturing businesses need funding not to patch up an emergency, but rather to seize an opportunity. This might happen when you need to kick production into high gear in anticipation of the holiday season. Or, perhaps one of your products has been featured in the pages of a major publication. Maybe you’ve run a Kickstarter or taken a poll of your customers, only to find a huge chance to fill market whitespace.
Whatever your opportunity, you want to be able to quickly access capital to fund raw materials, labor, and anything else you need to keep up with growing demand for your product.
A business line of credit is an excellent source of manufacturing funding for this situation. This type of manufacturing loan is a kind of hybrid between a business credit card advance and a small business loan. You’ll work with a lender to get pre-approved for a sum of money—which may reach upward of $1 million for the most eligible businesses—but the best part is that you don’t have to use any of those funds unless you want or need to. And you’ll only pay interest on what you use, under prearranged terms with your lender.
Entrepreneurs across many industries keep a line of credit in their back pocket, so to speak, for situations just like this. (Though it comes in handy for emergencies and cash-flow issues, too.) And since you never pay interest unless you draw against your line of credit, this financing tool won’t cost you anything until you decide to use it.
It probably goes without saying that manufacturing business loans cost money. (They are, of course, loans.) But an alternative to loans is always looking for small business grants. These are trickier to find, qualify for, and ultimately obtain—but worth it, since the nature of a grant means that you don’t have to repay the money.
If you’re a manufacturing business operating for profit, you’ll have a trickier time pursuing a grant. That’s not to say there isn’t grant money out there for you—there might be! But there are two major situations under which manufacturing businesses will have the best potential to score grants:
Some grant funding is available for manufacturing businesses in economically disadvantaged communities with high unemployment rates that are creating local jobs, opportunities, and training programs for local workers. You might be able to find these grants from the local or state governments first, and then search nationally as well.
Suffice to say you’ll find more grant opportunities as a non-profit operation than you will as a for-profit. But even if your business isn’t registered as a non-profit, if you’re manufacturing products with a strong charity angle, or those that can be used in, say, a disaster situation, you might be able to find a grant to support your production. You might want to begin your search with corporate incubation arms.
As with any type of small business funding, the further in advance you can apply for a manufacturing loan, the better. This will allow you to be choosier about the type of financing you can apply for, as some types take longer than others (like SBA loans vs. invoice financing, for instance).
And as a general rule, the more urgently you need funding, the more expensive it tends to be. Of course, you can’t always see an emergency coming, but you can predict seasonal dips or a planned production run. In that case, you want to prepare when you can.
Here are a few questions to ask yourself before you pick the right source of manufacturing business funding for your company:
If you’re looking to finance a specific need, such as replacing equipment, versus looking for general working capital, the type of amount of funding you seek will be different. Figure out exactly what you’re using the cash for before you apply. (Heads up: Your lender will ask you this, too.)
We’ve mentioned this a few times, but it’s important: Some loans are designed for fast access to capital; others are decidedly not. If you’re up against a wall, you’ll necessarily have to rule out a few categories of financing. But you still have options.
Just because you want a loan doesn’t mean you’ll be eligible for one. Lenders evaluate your credit history, among other criteria, to decide if you’re a trustworthy candidate who is likely to repay your loan. Borrowers with strong credit have more business loans, with better terms, available to them than those with challenged credit. Which is not to say that you’re entirely out of luck if your credit score has taken a hit—you’re not! You’ll simply need to adjust your expectations about the variety of loans you’ll have access to, and at what rates and repayment terms.
With these tips in mind, you’re better equipped to seek the manufacturing business funding that makes sense for your venture.