The economy is now open for business and many businesses are looking to bring their manufacturing back onshore after the COVID-19 pandemic exposed weaknesses in overseas supply chains. Existing and emerging manufacturers will see great opportunities for growth or expansion.
With growth means investment – with the most straightforward investment coming from long term loans or lines of credit. Here are five things to consider when seeking credit for your manufacturing business.
What Are You Looking to Achieve?
Before applying for loans, you must know what you want to achieve. Do you want to expand your operations? Take on more orders? Have multiple locations? Do you wish to vertically integrate some processes that are currently outsourced? You must match your funding with the assets you seek to finance, as using long-term liabilities to fund inventory, a short-term asset, may interrupt vital cash flow.
Financing Equipment or Space
If you are anticipating that you’ll need capital for financing equipment or real estate, you will need some kind of long-term loan such as equipment finance or Small Business Administration loans. SBA Loans amounts can go up to $5 million, with repayment terms between five and 25 years. These may require collateral in order for approval. You can also look at small business loan options to finance your new equipment; or turn to leasing if you need a rapid turnover of equipment or only require equipment temporarily.
Optimizing Cash Flow Management
Cash flow is the life blood of any business and buying materials or inventory can tie up your working capital, especially if you want to take advantage of bulk discounts. The big mistake, as mentioned before, is using short-term liabilities to fund long-term assets and vice versa. Make sure you use the right kind of loans to fund your operations – a five-year loan should fund a piece of equipment with at least five years of operational life in it.
Lines of Credit
Lines of credit are revolving loans that you can use as a flexible funding source that can help shore up seasonal cash flow discrepancies or sudden short-term costs. You only pay for what you use, meaning if you borrow $100,000 you will pay interest on the $100,000 at the end of the month. They also attract annual fees and transaction fees, which are based on a percentage of what you borrow.
Invoice factoring, also known as invoice finance or purchase order finance is a type of finance where a financier will pay a proportion of your accounts receivable invoice immediately, with the remainder coming when your debtor has paid the invoice in full, minus account fees and the “factoring” fee which is a percentage of the rest of the invoice, calculated per week or month. This can help you get cash flowing quickly, but overreliance on invoice factoring can mean reduced income and have flow-on effects with your working capital.
Remember to consult a financial adviser before taking out any type of business credit.