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Financing Options for Manufacturers

Posted September 2nd, 2021

One of the most common mistakes manufacturing business owners make is to view debt as a bad thing, a thing to be feared, rather than as a tool for growth. It’s not hard to understand why. Traditional funding solutions like bank loans are often difficult for manufacturers to obtain, and not every funding source available is created equal. One bad choice — like taking out a Merchant Cash Advance with a daily debit when you get paid monthly at best — can do serious damage to your company’s financial viability.

But that doesn’t mean that debt is a bad thing, and it doesn’t mean there are no good options for manufacturers. Business owners borrow money for lots of different reasons. Determining WHY you need the money is the first step in selecting the right financing option to capitalize on opportunity.


Cash. Everybody loves it. Cash is king for a reason — it can save you when there are no other options. Access to cash is important for actual emergencies. While a lot of early business owners enjoy the feeling of paying bills in cash, it’s important to keep a sizeable reserve of cash for emergencies.

There are five critical rules for cash to always keep in mind:

  1. Never run out of cash.
  2. More cash is better than less cash.
  3. Cash now is better than cash later.
  4. Less risky cash is better than more risky cash.
  5. And finally, never run out of cash. (It’s THAT important.)

Good for: Ensuring your ability to survive during an emergency (like a pandemic), making sure payroll is covered when your customers pay late, or taking advantage of an opportunity that arises.

Don’t use for: There are no bad uses of cash per say, only when you deplete all your cash.

Line of credit

This is the gold standard for working capital lending. The funds in your line of credit can be used for anything. Similar to cash, though, it is important to save some availability in your LOC for more critical needs and opportunities as they arise.

Lines of credit are designed to be used and paid down frequently. If you pull the entire available limit and keep the balance high your lender may “call the line” and “term out” the line, which can cause an unexpected cash flow challenge for your business.

The only real downside to a LOC is that is retrospective — it is typically determined by your past 24 months financial performance, not the next 24 months. If you are growing fast, you may outgrow your line of credit quickly.

Good for: Working capital. The cash needed on a day-to-day basis to manage expenses that will otherwise turn into an invoice you will be paid for soon.

Don’t use for: Buying equipment or other capital expenditures that you don’t intend to pay off quickly.

SBA loans

A term loan or working capital line approved and backed by the Small Business Administration is often easier to acquire than a traditional bank only line of credit, if you qualify as a small business.

SBA loans require a lot of documentation and a good sponsor. Working with the right bank to sponsor your SBA loan is very important, as it can impact how they present your business. Not every bank will get you the same SBA loan – the bank determines a great majority of the decision, not the SBA.

The downside to an SBA loan is once your company grows too large, it will no longer qualify.

Good for: Working capital, initial capitalization for your business, acquiring or merging with another business, buying out a partner, refinancing debt.

Purchase order financing

Purchase order financing offers you cash before the work starts, which makes it an attractive option for manufacturers with tight cash flow. PO financing is based on your purchase order, your customer’s credit, and your supplier’s reputation.

Funds from purchase order financing do not go into your company’s bank account. The money is sent directly to your suppliers. This ensures the money is only used for the materials or supplies needed to perform the work on the purchase order. After the work is complete, you’ll send an invoice to your customer like normal, but the customer will pay the lender directly. Once payment is received, the lender will repay the borrowed amount, plus any fees or interest due, and forward the remainder to you.

Good for: Cost of Goods Sold (COGS) purchases, other materials.

Work-in-progress financing

Work-in-Progress (WIP) financing is an important tool specific to manufacturing can help overcome common cash flow challenges and better align with your business’s cash flow cycle than other funding options.

The loan is based on an outstanding purchase order. The lender determines the amount needed to complete the order and reviews the purchase order as well as the company’s financial status. Upon approval of the loan, the lender will purchase the needed materials on behalf of the business. If for labor, the lender will verify the payroll costs and issue payment through the business’s standard payroll process.

When the product is delivered or installed, the client’s customer will send the payment to the client’s lockbox account that the lender has created for them. The lender will then deduct the cost of the materials plus the interest and financing fees, and then pay the remaining balance to the client.

Good for: Short-term project-based funding needs to fulfill orders.

Keep in mind: WIP financing is most often available to established businesses that have other receivables. It is not typically available for startup companies. 

Invoice factoring

Invoice factoring significantly shrinks the 30-60 days between you submitting an invoice and receiving payment. A factoring company advances a percentage of the invoiced amount to you at the time you submit the invoice to your customer. This makes it a powerful tool to balance out unpredictable cash flow streams.

The drawback is invoice factoring does not get you funding before a job starts or before you submit an invoice. Most factoring companies also require that you remit all of your invoices related to a specific project, or all invoices for your entire company for a specific amount of time.

Good for: Project-related expenses and operational overhead associated to the project you invoiced.

Don’t use for: Buying equipment or starting another project, or paying off long term debt (you need profit for that or another form of long-term debt).

Merchant cash advances

Merchant cash advances are an advance upon future receivables. They are easy to get — in fact, brokers will come to you if they think you’re in financial trouble — and the money is available quickly, but they can have devastating effects including bankruptcy and damage to your personal credit.

A merchant cash advance repayment involves a daily or weekly draw from your checking account. These daily withdrawals are tough for manufacturing companies to keep up with, especially in the months after a project is completed but the loan is still active.

Think about like this: If you take out a loan today because you are short on cash and the repayment requires daily or weekly payments, but you don’t expect payment for 30 days, how can you possibly keep up? The reality is either the money comes from somewhere else — like payments to your suppliers or employee’s payroll, or you “stack” another MCA on top to try and stay afloat. Which is a common, but terrible, plan.

Good for: I cannot in good conscience recommend an MCA as I have seen way too many devastating things happen to great people.

Manufacturing financing: It’s all about why.

When you start from a place of WHY — why do we need this money and what will we use it for? — it is easier to determine which of the financing solutions at your disposal will work for your business and help you achieve your goals for profitability and growth.

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