Manufacturing businesses require a lot of capital to purchase heavy machinery, order raw materials and cover overhead expenses. But, as any business owner knows, cash flow pinches are common and without the right financing partner, a manufacturer can find itself struggling to stay afloat.
To help manufacturers keep their operations running smoothly and to meet the demands of customers, a variety of new and different small business financing options have emerged. This article outlines the types of loans and other funding options available for manufacturing companies as well as how to best utilize them.
The first thing a manufacturing company needs to do when looking for funding is to check its credit. Most lenders have their own criteria for what qualifies as a strong credit score and a robust business history, but some lenders are more lenient than others. Once a business has cleaned up its credit, it can shop around and compare rates and terms to find the best funding option.
Some lending options, like a commercial loan, provide a one-time cash infusion that is repaid over a set period of time at a fixed interest rate. This type of financing can be used to purchase industrial equipment, improve an existing facility or expand into a new market. The qualification standards for a commercial loan are usually more stringent than for other types of manufacturing loans.
Other types of financing for manufacturing companies include a line of credit, which offers more flexible access to funds. A line of credit is similar to a credit card, in that it allows a manufacturing company to borrow up to a certain amount (called a credit limit) and pays interest only on the funds it uses. The qualifications for a line of credit are usually less stringent than those for a commercial loan, and some lenders even offer a special manufacturing business line of credit.
Another option for manufacturing companies is accounts receivable financing, or invoice financing. This is a quick way for a manufacturing business to get an infusion of cash while waiting on clients to pay their invoices. It is important to note that the money a manufacturer gets with invoice financing is not always immediately available, so it’s not ideal for short-term cash needs.
Other financing options for manufacturing businesses that are more flexible and less costly than traditional loans include a merchant cash advance and an equipment loan. A merchant cash advance is an advance on future credit and debit card sales that a manufacturing business can use to quickly raise capital. An equipment loan is a secured loan that is often easier to qualify for than other types of manufacturing loans because it is tied to an asset. It’s important to remember, though, that any assets used as collateral can be seized if the business defaults on the loan.