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:
- Never run out of cash.
- More cash is better than less cash.
- Cash now is better than cash later.
- Less risky cash is better than more risky cash.
- 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.
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 (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 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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A Service Level Agreement (SLA), the agreement between you and your customer on what each can and should expect from the other, is central to meeting customer demands and expectations, and working capital is essential to meeting the SLA parameters. Working capital represents the assets or cash flow available to make payroll, pay suppliers and cover other production expenses. While working capital has a tremendous impact on a manufacturer’s ability to meet a customer’s SLA, the two are rarely discussed in the same conversation. In part, these conversations are siloed by the two departments that manage them — finance or accounting and operations, respectively. When you bring them together, however, you can immediately see how working capital can help your manufacturing business meet your customers’ service levels.
The importance of a service level agreement
We live in an instant-gratification world, and this “I want it when I want it” mentality has already moved beyond same-day Amazon drops and into business relationships. Manufacturers need to ensure they can meet customer demands quickly, which also means their suppliers must be equipped to meet the manufacturers’ demand for raw materials.
A service level agreement ensures the manufacturer and the customer are on the same page. The SLA covers expectations regarding pricing, batch or order sizes, timelines, minimum quality standards, and more. A comprehensive SLA between your company and all of your customers allows you to determine the ready rate and safety stock needed to satisfy a customer order from stock on hand. If your company manufacturers custom products based on customer orders, an SLA helps determine the expected order cycle and the lead time you and your suppliers need to meet that cycle.
The importance of working capital management
Working capital is one of the biggest challenges manufacturers face, and recent escalating costs have only made it more critical. Manufacturers face cash flow challenges regularly as their industry’s business model is built upon supplier and production expenses being accrued well in advance of goods being sold to customers. Additionally, many customers have extended payment terms — or simply don’t pay on time — compounding the issue for manufacturers.
When your current assets minus current expenses equals a negative number, you have negative working capital. Negative capital is one step away from cash flow problems, and cash flow is one of the top reasons manufacturers (and all other small businesses) eventually collapse. Working capital management aims to spot these cash flow issues early and resolve them in advance.
How working capital management leads to better service level compliance
Available working capital allows manufacturers to plug the gaps in cash flow caused by production costs at the start of a new project as well as those caused by slow-paying clients. In addition, freely available capital (cash on hand not already allocated to an expense) can be used to make smart, strategic decisions that improve service level compliance. This may include buying materials from additional suppliers to increase the stock on-hand for a rapidly re-ordering customer, shortening the lead time between an order and fulfillment.
Working capital can also be used to improve quality through changes in suppliers or in the operations on the floor of the plant. Finally this capital can be re-invested into the company for digital transformation, equipment maintenance plans, new hires, and more.
Need access to more working capital? Check out our PO Financing and WIP Financing solutions, created with manufacturers like you in mind.
Purchase Order Financing, or PO Financing, is a type of commercial financing that leverages the purchase order from your customer as collateral for the loan.
What Is PO 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. A lender will charge an interest rate on the advance, usually somewhere between 1 to 6 percent per month.
How does PO Financing Work?
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.
For example, let’s say ABC Manufacturing produces heavy-duty, preservative-treated wood for utility poles, marine pilings, and agricultural structural posts. ABC owner Lee gets an order to provide the pilings for a new marina. The purchase order is worth $750,000—a huge opportunity for her company—but, she doesn’t have the capital to order all of the necessary supplies. She works with a PO financing company to secure a loan of $245,000, which allows her to pay her suppliers and fulfill the customer order. After she submits her final invoice, the customer pays back Lee’s lender, and Lee is sent the remainder. The PO financing allowed her to take on a larger order than before, fulfill the order on-time, and STILL make a profit. This additional profit streamlines ABC Manufacturing’s cash flow, allowing her to start the next job without a cash flow crunch.
The Risks and Benefits of Purchase Order Financing
One of the greatest benefits for business owners is that Purchase Order financing starts before the job. It’s definitely less risky than Merchant Cash Advances, which promise fast cash but too often end up delivering a crushing cycle of debt.
On the other hand, PO financing relies on the credit of your supplier and your customer, rather than on you and the job’s contract. Many Purchase Order financing companies also ask that the business expect at least 30% profit margin from the total order. That might not give you pause, but how certain are you of your numbers?
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Is PO Financing Right for Your Company?
Purchase Order financing can help you free up cash before a job starts, but is it the BEST option for your manufacturing company? The short answer, of course, is: It depends. Do you already have an existing line of credit with your supplier? Don’t borrow money from a third source when you can get the materials you need on credit straight from the supplier. Instead, borrow for the things you can’t get on credit.
PO financing from a reputable lender, like us, empowers you to start work confidently. Without this financing option, you could miss out on new customers and larger orders that ultimately will help your business grow.
Is there such a thing as “good debt?” Yes, there is. What is the difference between good debt and bad debt? Good debt helps you grow. Bad debt weighs you down.
For example, meet Kelly, owner of Kelly’s Creations.
Kelly has owned and operated the small manufacturing company for 10 years, ever since her dad retired. Kelly is very proud of her fiscal responsibility. In her early twenties, she had a small mountain of credit card debt, which she has paid off. Now, she pays for EVERYTHING in cash, both in business and in her personal life.
One day a customer comes to Kelly with an order too big to fill with her traditional materials budget. It’s a huge opportunity for her company, but she’ll need a funding source. Kelly thinks she’s a shoo-in for a small business loan. She’s never missed a payment to any of her vendors and she has a solid chunk of reserve cash in her bank account.
But what Kelly doesn’t have is credit history. Since she’s never borrowed before, there is no way for the bank to ensure she’ll be responsible with the debt. She is denied the loan.
Debt is not inherently bad.
As Kelly learned, debt is not inherently bad. We know this is true on some level, because most of us take out a mortgage when we buy a home. We may even take out a loan to buy a new car. We accept these forms of debt as necessities. But when it comes to business, many leaders try to avoid debt like the plague.
It is not the plague, though. Debt can be an important part of your business strategy, if you use it wisely.
Types of debt, good and bad.
There are commonly held beliefs on what constitutes “good debt” versus “bad debt.” Examples of good debt are:
- Lines of credit
- Small business loans
- Automobile loans
- Student loans
These are loans that either pay for an essential in your life, like a house or vehicle, or represent an investment that will pay you a return. Bad debt, on the other hand, has no chance of generating long-term income and/or pays for something that quickly loses its initial value. Bad debt examples typically include:
- Credit cards
- Payday loans or cash advances
- Automobile loans
Did you notice something odd? Automobile loans is on both lists. That is an important point — automobile loans allow you to purchase an essential life item, but the loan itself does not generate income and the item in question quickly loses its value. (Unless you are buying a classic, like the 1969 Dodge Charger, in which case … drive safely!)
Which brings us to the point: It’s not the debt that is bad or good. It’s how you use it.
Good debt is all in how you use it.
It may be convenient to classify one type of debt as “good” and another as “bad,” but these labels do business owners like you a disservice. They strip you of the power to decide how debt will impact your business.
For example, credit cards are commonly thought of as bad debt. But, if you are a small business using a credit card to purchase supplies and you pay the card off every month, this is actually good debt! You are using the money to leverage your buying power and capacity to grow your business (generating long-term income) and you are building a solid credit history.
Let’s talk about another suspect on the lists above: student loans. Investing in your education is great, except expected median salaries haven’t kept up with the cost of a degree. For example, if you borrow $80,000 to get your bachelor’s but only earn a $70,000 salary afterward, you’ll feel the pinch of those payments when they get added onto the rest of your household debt. The situation is even worse for students who take out loans and do not receive a degree.
Even merchant cash advances, which we talk about at length and warn manufacturing and construction subcontractors away from, are not inherently bad debt. Are they risky? You bet. Do we caution business owners in industries like manufacturing and construction away from them? All day every day. But, plenty of business owners use MCAs effectively. They understand the payment structure and know their cash flow can support it.
See how it gets complicated? The real question is not in whether a source of funds is good or bad, but whether you will use the money in a way that allows the investment to pay for itself through business growth and revenue generation.
The ability to borrow in order to capitalize on big opportunities, like Kelly and her customer’s big order, can be the difference between growth, stagnation, or decline for your company. And here’s a tip: Stagnation is decline you haven’t noticed yet.
So now you know that debt is neutral until you use it. The next question is, how much debt should your company have?
How much debt is too much debt?
Now we come to the crux of the matter: balancing opportunity with debt. How much debt is too much debt? There is no hard and fast answer; it depends on your business’ growth plans, the type of debt and cash flow. You can and should keep an eye on your company’s overall debt, especially as it compares to your total income.
This is something your CPA should be reporting on each month — you do have a CPA, right? If not, read this next: 4 Signs You Need to Hire an Accountant for Your Commercial Construction Business.
The fate of your debt lies in your hands.
Are you worried about Kelly? Don’t be. She found the funding she needs, and has since opened up lines of credit with a few of her suppliers and hired a CPA to help her develop financial strategies that will grow her business. She still pays for most items in cash — old habits die hard.
YOU can learn from Kelly’s mistakes. Debt is not an evil boogeyman lurking in the shadows waiting to destroy your business. Debt, when used correctly, can open doors to new opportunities for your business, help you achieve your goals, and give you the foundation you need to GROW.
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“You’re either growing or you’re dying” is a popular business idiom. For some companies to grow, they rely mainly on customer referrals and organic market growth. For everyone else, you either need to generate more leads, capitalize on bigger opportunities, or some mixture of both.
Here’s another business quote, “You have to spend money to make money.” In order to execute a lead generation strategy or say YES to the next big job, you will need extra capital. Borrowing capital makes a lot of business owners nervous, especially in cash-flow volatile industries like construction and manufacturing. We wrote this article to show you how to borrow money the smart way in order to grow your business.
Know WHY you are borrowing and for WHAT.
Do you need a short-term loan in order to take advantage of a supplier’s discount, or an influx of cash to move forward on a new location or launch a new service line? Knowing WHY you need the money — the goal behind WHAT the loan is expected to do for you — can help determine which funding option is right for you.
Are you borrowing capital to fund a marketing or advertising strategy? Make sure you have clear goals around the campaign. Ultimately, the new leads generated by your marketing should more than cover the cost of the loan. Marketing is a long-term investment, so your funding options should have longer payback schedules.
Are you ready to take on a larger project, but need funds to cover the first few months of work? Commercial construction subcontractors often need a cash flow boost when they mobilize on a new job. It’s just the nature of the industry. This kind of short-term need benefits from short-term funding options that can be paid back once you start getting paid for the job.
At the end of the day loans for existing businesses fall into two categories:
Loans for tangible investments, like property, vehicles, or equipment. This is used for items you need and can pay off using the existing cash flow of the business. In other words, your business should be able to handle the monthly payment of the loan.
Working Capital Loans allow your business to take on existing work and are needed when certain costs are incurred by the business that fall outside of when you are paid by your customers. If you need money to purchase materials or pay for labor associated to existing work you have not been able to invoice or be paid for yet, this would be the loan for you.
Only borrow what you need.
When lending partners tell you how much they could loan to you, it can be hard to walk that number back. Think of all the things you could do with all that money, right? Wrong. Borrowing more than you need is a great way to increase your company’s debt right when you’re trying to grow.
Figure out exactly how much you need to accomplish the goal you identified previously. Borrow that much and no more. Remember, if you need cash later it will be easier to get if you have successfully paid back your first loan.
Getting more money than you need and therefore using the wrong type of loan to pay for the wrong items will put your business in jeopardy if something goes wrong.
Research your funding options.
Every funding option has advantages and drawbacks. It’s important to do your research and choose the one that best works for your company and your business goal. A daily debit or Merchant Cash Advance (MCA) may seem like the perfect “quick cash fix” for your short-term growth goal, but they come with a host of challenges for commercial construction companies. Here is a “cheat sheet” of the common funding options to get you started.
Small Business Loans are one of the most traditional form of small business funding. Whether you secure your loan through a bank or a lending partner, most small business loans have competitive interest rates — fixed or variable — and a set repayment schedule. They require a strong credit score and collateral to back up the loan in order to qualify. Since the Great Recession, it has become significantly harder for companies in industries like construction and manufacturing to qualify for traditional loans like these. These loans will rely heavily on your personal credit.
SBA Loans are small business loans of which up to 80% of the principal of the loan is guaranteed by the Small Business Administration. This reduces the lender’s risk and opens new funding opportunities for small business owners. The requirements for an SBA loan are similar to a small business loan, with the addition of your business qualifying as a small business according to the SBA. These loans also will rely on your personal credit and have a minimum credit score requirement of 650.
Commercial Credit is a pre-approved amount issued by the bank or lending partner that your company can access at any time. Commercial credit is often used to cover unexpected costs or to take advantage of a sudden business opportunity.
Working Capital Loans cover a company’s routine operational expenses such as payroll, rent, or debt payments. This type of loan is good for companies that experience uneven or cyclical cash flow cycles. For example, many manufacturing companies need short-term funding during the fourth quarter, when their customers are focused on selling the goods already made. The manufacturing companies repay the debt in the spring and summer, when orders pick back up.
Invoice Factoring is commonly used in commercial construction and manufacturing. The factoring company works directly with your GC or customer to verify an invoice is accurate and owed to you, then you are advanced up to 80% of the invoice amount. When the factoring company receives payment for the invoice, it repays itself the amount advanced to you, plus a fee. Any remaining balance is sent to you. This is a good option when you have invoiced your customer already and are just waiting for your customers to pay you, but they are not paying fast enough. This is not good if you need cash before you are able to create the invoice.
Purchase Order Financing is like invoice factoring. The PO financing company will pay your supplier to fulfill the order. The customer pays the PO financing company directly. It deducts its fees and sends any remaining balance to you.
It’s important to note that in both Invoice Factoring and PO Financing situations, the lender is most often directly involved with your General Contractors, customers, suppliers, and vendors.
Merchant Cash Advances (aka Daily Debit Loans) are “quick-cash” solutions designed for industries with a daily cash flow cycle, such as food and hospitality or retail. MCA repayment involves a daily or weekly draw from your checking account, which can make forecasting your cash flow even harder than before. While MCAs work in industries like hospitality or retail — where a daily cash flow can potentially meet or exceed the daily debit — it is almost impossible for commercial construction companies to keep up, especially in the months after a project is completed but the loan is still active.
MCA loans are very easy to get and can be deposited in your account within days which make them very tempting to take on. However, like most things that are easy they can come with some significant drawbacks. Anytime the repayment cycle of your loan does not fall in line with how your revenue is realized you will likely have a problem. When those problems come the solution is NOT TO TAKE ON ANOTHER ONE!
Borrow capital to grow.
Once you have identified the goal of your funds and the potential funding sources, it is time to make sure you and your company are ready to capitalize and mobilize. Forgive us one more aspirational quote, “When opportunity knocks, be ready to open the door.”
What do you need to do to maximize the potential benefit this influx of cash could give your business?
- Make a game plan for the funds based on your goal.
- Get your business and personal financials in order. That includes credit reports and tax returns.
- Establish relationships with other partners and vendors. If any of them can cut you a deal if you act quickly, that can be part of your funding strategy.
- Talk to the experts about your funding options and YOUR unique business needs.
Growing with Mobilization Funding.
If you are a commercial construction subcontractor or manufacturing company looking for a funding partner who can help you grow and succeed — you’re in the right place. We have structured our lending platform and services to serve the unique cash flow cycles of your industries. We work WITH you to create the unique lending solution that works FOR you.
You can apply online here, or give us a call at 813-712-3073. (Don’t worry — a real person will answer the phone and be ready to help you.)
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Does your manufacturing or fabricating business need additional funds to cover a cash flow pinch caused by a big order or a slow-paying customer? Work-in-Progress (WIP) financing is an important tool specific to the industry that may overcome these and other common cash flow challenges and better align with your business’s cash flow cycle than other funding options.
What Does Work-in-Progress Mean?
WIP is a production and supply-chain management term describing partially finished goods awaiting completion. WIP includes the different components that are built into the cost of the business’s products, such as:
- Allocated Overhead Costs
Let’s say your business manufactures kitchen cabinets and received a big order totaling $300,000. It will cost your business $100,000 for the wood, $25,000 for other materials and another $25,000 for payroll, for a grand total of $150,000 of allocated costs to that order. But your business only has $50,000 in cash available to pay for those costs, leaving you with a $100,000 shortage. WIP Financing will provide you with that $100,000 so that you can deliver those cabinets, get paid $300,000 and repay the loan.
How Does WIP Financing Work?
WIP financing is most often available to established businesses that have other receivables. It is not typically available for startup companies. In approving the WIP financing application, the lender will:
- Review the outstanding purchase order or other documentation from the client’s customer.
- Access the costs associated with producing the product (what the WIP financing needs are) and compare to the purchase order.
- Determine the amount of time needed for the Client to execute on the Purchase Order and Invoice their customer.
- Perform basic financial analysis of the overall company through the application process.
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.
With the cash flow problem taken care of, the client will then create the product. 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.
As a short-term funding option, WIP financing allows manufacturing businesses to grow and fulfill orders with a portion of their gross margin on the order rather than suffering through a cash flow pinch that could lead to delays or other issues.
Work-In-Progress (WIP) Financing is specifically designed for manufacturing companies that need additional funds for things like raw materials and labor costs, which are associated with the production of orders.
This product can also be referred to as a purchase order (PO) financing, however, can vary depending on the type of business and its needs. Other options available to manufacturing or fabricating companies include a line of credit, factoring, equipment loan or a Merchant Cash Advance (MCA). Click here to learn more about different loan options for your manufacturing business.
Do you have additional questions about WIP Financing or want to apply for WIP Financing? Contact a Mobilization Funding expert today at 813-712-3073 or click here.
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In the decade following the Great Recession, many American manufacturing business owners have struggled to secure loans or lines of credit from traditional banks. As a result, a host of new and different lending options have sprung up to help manufacturers looking to expand, better manage their cash flow, purchase new equipment and more.
Manufacturing is a capital-intensive industry. Companies need financing to buy and repair heavy machinery, order raw materials, as well as cover labor, shipping, and overhead costs. Cash flow pinches are common and without the right funding partner, a business will be limited in how much it can grow or overcome obstacles. Often times this puts unneeded stress on the business and the business owner(s).
While there are plenty of organizations that offer loans to manufacturing businesses, it can be especially difficult to figure out where to start. The first step is to identify what type of manufacturing business loan you need. The majority of manufacturing business needs can be split into one of three categories: Real Estate, Equipment/Machinery, and Cash Flow/Working Capital.
Here is a guide to help you better understand what types of loans are available for each of these three most common manufacturing business needs.
Funding for Real Estate
Do you need to purchase a new space for your business to operate? Or is your current property in need of renovations and/or an expansion?
Finding a real estate loan can be a challenging and arduous process. Often credit scores for both the business and individual owner(s) are important factors in being approved for a real estate loan.
Often these are term loans, such as a Business Mortgage Loan or a Business Construction Loan. Like a home mortgage, these are long-term loans repaid over a period of between 5 and 20 years. There are some lenders who can issue Immediate Term loans to purchase or develop the property with repayment limited to two years or less.
Real estate loans often require a certain Loan-to-Value Ratio, which is the amount of the mortgage divided by the appraised value of the property. The higher the Loan-to-Value Ratio, the more difficult it will be to qualify and the more expensive the loan will cost. In order to offset that ratio, a down payment is often necessary. In addition, the lender will require a lien or other forms of security on the property.
Types of Business Real Estate Funding:
CDC/504 SBA Loan is another government-backed loan, the 504 SBA Loan must be issued through one of over 260 Certified Development Companies (CDC’s) and are almost exclusively designed for fixed assets, such as a real estate purchase or renovation.
While not restricted to real estate, an SBA 7(a) loan guarantee can function as a Business Mortgage Loan backed by the Federal Government’s Small Business Association. SBA 7(a) loans are up to $5 million and can cover up to 90% of the property’s value.
Hard Money Loan or Commercial Bridge Loans are types of short-term funding that allow a business to buy or fix commercial property before refinancing to long-term mortgage. Interest rates are typically between 8% and 13%, but also come with additional fees that often include closing costs.
Traditional Business Mortgages are in many ways similar to a residential mortgage. The big difference is that a Business Mortgage can only be made for commercial properties, which are those that generate income and are often zoned that way. As a residential mortgage, business mortgages require a down payment and are then paid off in equal monthly installments spread out over the mortgage’s term.
Tip: Your town, city or state may have an economic development office with programs to help your manufacturing business succeed. That may involve a program to cover the cost of your down payment, or grants to help upgrade machinery or training.
Equipment or Machinery
Equipment and Machinery Financing can be split into two categories: Rent/Leasing or Equipment Loans.
Renting, Leasing and Equipment loans are common options when shopping for heavy machinery and equipment. The big difference is that a rental or lease agreement is one in which you agree to pay for the use of another company’s property. Meanwhile, a Term Equipment Loan is for the title and ownership of the equipment or machinery. Both types frequently require a down payment and then equal monthly payments for a set period of time.
Where to get them: Term Equipment Loans are offered by a host of different lenders, from large banks to your equipment dealer, local credit unions and alternative lenders. Interest rate and terms are often dependent on your personal and business credit history, and most lenders place a lien on the equipment or machine as collateral.
Cash Flow Shortages
Outside of real estate and big equipment purchases, there are countless reasons a manufacturing business would need additional funds to better manage cash flow.
Cash flow refers to the funds coming in (revenue) and going out (costs). It is inevitable for a business to find itself in a cash flow pinch at some point when revenue falls short of costs and expenses. These cash flow pinches can be caused by accelerated growth in the business, a slow-paying customer, unexpected expenses, natural disasters, or a ramp-up in business where you need to increase labor or make a big material order. But at the end of the day, the mortgage or rent still needs to be paid, payroll needs to be met, and materials ordered.
Many businesses use multiple strategies to overcome cash flow pinches without taking out a loan. Those include:
- Negotiate with customers to get a partial payment up-front.
- Ensure the business has cash reserves in place to get through slow periods
- Communicate with material suppliers or vendors to secure extended payment terms, allowing more time to pay invoices.
- Say no to new revenue opportunities – turning down new business is not what owners typically like to do!
- Sell equity in the business to a new partner who will provide the needed funds.
- TIP: Selling equity is the most expensive type of funding you can ever take out, as it is permanent.
Line of Credit for a Manufacturing Business
If those efforts still won’t cut it, manufacturing business owners should turn to a local credit union or traditional bank and apply for a Traditional Bank Line of Credit. That will allow the business to borrow as needed up to a certain amount (called a Credit Limit) and then make at least the minimum monthly payment until you have the funds to pay it off.
Lines of Credit from a traditional bank or credit union generally have lower interest rates than if secured through an alternative lender, and the business only pays interest on the amount borrowed at one time.
Work In Progress (WIP) Financing
Another option for businesses is to finance their raw material and labor costs associated with the production of orders, referred to as Work In Progress (WIP) Financing. In this loan option, the lender will purchase the needed materials on behalf of the business, which will then create the product. Upon delivery of the product, the customer will pay the lender, which will deduct the cost of the materials plus the interest and financing fees, and then pay the remaining balance to the business. This allows the business to grow and fulfill orders while financing that growth with a portion of their gross margin on the order versus their overall business. This product can also be referred to as Purchase Order (PO) Financing, however, each is slightly different depending on the type of business and its needs.
If a cash flow pinch occurs at the end of the production cycle and outside funding is needed while the business waits on payment for a particular invoice, a good option is to Factor that receivable.
Factoring is when a receivable or invoice is purchased by the factoring company via a direct Assignment of that receivable or invoice from the companies’ customer (referred to as an Account Debtor). The factoring company will advance anywhere between 60% and 90% of the verified invoice amount to the business, and when the factoring company receives payment from the Account Debtor, it will deduct the amount of the advance, plus interest and fees, then send the remaining portion to the business.
Tip: Be aware of the specific terms of the Factoring Agreement. Some companies will charge a flat fee per month (1 – 4%) if the invoice is paid within 30 days, but can go up significantly after 30 days if the payment from the Account Debtor has not been paid yet. If your customer takes too long to pay, that rate hike can be a major dip into your profit margin on the job.
Merchant Cash Advance (MCA)
Merchant Cash Advances (MCAs) are offered by many alternative lending companies around the country. While not specific to manufacturing, MCAs are available to companies that do not necessarily qualify for other lending products.
MCAs are available based almost exclusively on the amount of cash/deposits flowing through the business bank accounts. Funds are generally issued as a lump sum and then the funding provider will begin making daily, weekly or monthly automatic withdrawals (via ACH) from the business account until the receivable advance is paid in full, including all fees and interest.
Typically, MCAs cannot be paid off early. Since this product is a purchase of future receivables typically the entire amount must be paid off in full regardless if the Merchant wants to pay it earlier than the scheduled term.
Funding for Your Manufacturing Business
Whatever type of funding you are looking for, Mobilization Funding is here to help. Our experienced team of professionals can help you to identify the right program or loan to help your manufacturing business achieve its goals, either through our lending program or through one of our trusted funding partners. Contact us today for a free consultation and we’ll help you find the best fit for your business.
Manufacturing is an essential part of the American economy, supporting 8.5% of the country’s workforce. Of the nearly 252,000 businesses that work in manufacturing, 75% of them have less than 20 employees, according to the National Association of Manufacturers. For many small businesses, it can be difficult to find a loan, whether through a bank, the Small Business Association, or alternative lenders offering cash advances loans or factoring lines. And this is doubly true when it comes to a manufacturing business loan.
Without the dollars they need, even established manufacturing companies struggle to overcome shortfalls to their cash flow. Many make up for it by delaying payment to vendors, passing on good jobs, holding off on hiring, or going into debt.
Mobilization Funding’s Manufacturing Business Loan
Unlike other lending programs, Mobilization Funding is available for businesses before they invoice for their products. With the capital they need on hand, they can order raw materials, make payroll, negotiate better terms with their suppliers, and function more smoothly overall.
Here’s how it works:
- 1. Receive an order.
- 2. Mobilization Funding will review the purchase order or contract and build a repayment structure to match up with your cash flow and work schedule.
- 3. Once approved, complete the required paperwork.
- 4. Loan is funded!
- 5. Order materials, pay labor, cover shipping costs, etc.
- 6. Deliver products.
- 7. Upon payment for order, the loan is repaid.
A Mobilization Funding Work in Progress loan is one option for manufacturing businesses that have been operating for at least two years and need up-front capital to order raw materials, pay for equipment, or cover other expenses like labor and shipping.
The approval process typically takes about five business days, and there’s no penalty for an early payment. And yes, you can have several orders with different clients.
Most lending partners ask for verifying paperwork during the approval process, including copies of driver licenses, Articles of Incorporation, and an SS-4 form notice. The SS-4 form notice, also known as an EIN Confirmation Letter, verifies your Employer Identification Number (EIN). Why do we need to verify your EIN? An erroneous or invalid EIN can lead to all sorts of headaches, including tax return conflicts and even a potential tax audit.
The good news is that verifying your EIN is easy — all we need is your IRS-issued SS-4 form notice.
What is an SS-4 form?
The SS-4 form is used by businesses to request an EIN from the IRS. If you don’t have an EIN, then this is where you’ll start. Most lenders, including us, can’t help you without an EIN. You can access a PDF of the SS-4 form by clicking here. Once the form is complete, you can mail or fax it to the IRS.
When you receive your EIN, the IRS sends an EIN Confirmation Letter. This is the verification your lender needs to approve your loan.
What to do if you don’t know your EIN
Some business owners discover that they don’t know their EIN. If this happens to you, don’t panic. Your bank should have your EIN on file — you most likely had to provide it when you opened an account for your business. If not, you can request the number from the IRS by completing an EIN 174c Verification Letter.
How to request a copy of your SS-4 Form Notice from the IRS
If you know your EIN but can’t find your SS-4 form notice confirming your EIN, there are a couple of ways you can get a copy. If you have an accountant, they may have completed your EIN application for you and have a copy of the confirmation notice. If that doesn’t work, head to the bank. Because most banks require an EIN to open an account, they verify the provided EIN with an SS-4 notice. Ask your banker to provide you a copy.
If all else fails, you can request a replacement copy by calling the IRS Business & Specialty Tax Line. The phone number is (800) 829-4933, and the line is open from 7 a.m. to 7 p.m., taxpayer local time, Monday through Friday. The tax specialist will ask you to provide your EIN and some identifying information about your business. Once they have verified your identity, you can request an SS-4 form notice to be mailed or faxed to your business. The IRS will only mail or fax to the address or number it has on file for your business.
You probably don’t need anyone to tell you this, but getting documents from the IRS can take awhile. This is why it’s a good idea to prep your documents before you start applying for a loan. You don’t want to be waiting on an SS-4 form when you need the money now! Ask the tax specialist how long the expected wait will be.
If you have other questions about applying for a commercial construction subcontractor loan, check out our Commercial Construction Financing Questions page. If you found this blog helpful and informative, you may also enjoy our Built For Growth Newsletter. Click here to subscribe and get more tools and resources sent directly to your inbox every two weeks.