The U.S. economy is opening up and the manufacturing supply chain is breaking down under the strain of increased consumer and industrial demand. In the short-term, this means frustration and friction as long supply lines strain to reach demand. But, in the long run, we see increased demand for manufacturing facilities in the United States where production is more dependable and intellectual property more secure.
As the economy recovers and the repatriation of the manufacturing supply chains takes hold, existing manufacturers will see tremendous opportunity for growth. However, growth requires investment in people, facilities, equipment and raw materials and each of these investments requires capital. When a manufacturer needs growth capital, it is important to have a financial partner who understands your business and can deliver liquidity quickly and dependably. If you anticipate the need for growth capital in the coming months, talk to your bank or to a small business finance company to determine what you qualify for and what products are right for you.
What financing options are available to small and medium-sized businesses?
1) SBA loans offer variable interest rates in the mid to upper single digits. Generally, they require a personal guarantee, but may not require additional collateral depending on the credit profile of the borrower.
2) Equipment finance offers fixed rates in the mid-single digits to mid-teens depending on credit quality. Secured by specific equipment and generally require a personal guarantee.
3) Term loans offer a wide range of rates depending on credit, term and speed to funding. Term loans may or may not be secured depending on lender and credit profile, but personal guarantees are generally required.
4) Cash-flow based financing products carry a fixed finance charge paid over the time it takes a business to book sales sufficient to repay the obligation. Finance charges vary based on credit profile and strength of cashflow. Personal guarantees of repayment are not required.
5) Purchase order finance and invoice factoring rates vary based on the credit quality of both the manufacturer and the purchaser of the end-product. Personal guarantees are generally required.
6) Revolving lines of credit offer rates that start in the low teens and go up from there. Personal guarantees are typically required.
The most challenging aspect of obtaining financing for many manufacturers today is the poor financial performance experienced during 2020 as the result of the pandemic. Banks and other lending institutions generally like to see steady, consistent cashflows year-over-year and look negatively on recent periods of volatility and unprofitability. Fortunately, non-bank small business lenders have developed underwriting models that weigh recent positive cashflows more heavily than historical financial results. That means, these lenders we can offer capital to growing businesses as they recover based on recent positive cashflow data. Most business lenders also recognize the need for financing when business is slower and can structure transactions that support growth and sustainability throughout the year, despite seasonality and market turbulence.
Leveraging PPP and growth capital to expand
The government provided a great service to small businesses during the pandemic by providing two rounds of PPP loans that helped many survive and prepare for an economic rebound. Many businesses have taken PPP money, and now for the first time in over a year, feel financially secure enough to consider expansion. With the final round of PPP now exhausted and the demand for U.S. manufacturing heating up, we are seeing a material increase in applications for financing from manufacturers seeking growth capital. Interestingly, we are seeing more young manufacturers applying for capital than at any time in history, as they look to exploit new market trends and changing distribution channels. Before the pandemic, the average manufacturer applying for financing had been in business for 12 years. Today, the average is nine.
What to expect when financing
If your business is preparing to apply for growth capital, the application process can be as simple as providing the last few months of business bank statements, a driver’s license and the authorization to pull credit on the business and its primary owner. Funding like this can generally be provided in 1-2 days without the need to post collateral. For larger amounts of money at lower rates, lending institutions will often require additional information such as tax returns, financial statements and purchase orders. Certain loans will require the business to post collateral such as equipment, inventory or real estate. Larger loans with more favorable re-payment terms generally require a more intensive underwriting process and longer approval timelines.
As the U.S. economy recovers, manufacturers are leading the way. Today there are more funding options available to small businesses than ever before.
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