Manufacturing is an essential part of the American economy, and current projections expect an average industry growth of about 2.8% between now and 2021. And yet, many manufacturing businesses find it difficult to secure a loan, whether through a bank, the Small Business Association, or alternative lenders offering Merchant Cash Advances, other accounts receivable-based lines, like invoice factoring, Work in Progress (WIP) Loans, and lines of credit.
Types of Funding for Manufacturing Businesses
Traditional Bank Line of Credit is when an established, operational business has up to a certain amount of money (called a Credit Limit) available to cover expenses or other costs. Interest is charged on the dollars that are being used, and the business must make at least minimum monthly payments. SBA Loans are government-backed loans issued by banks or other SBA-approved lenders and are available to established small businesses who cannot qualify for traditional financing. The loans generally can be used for working capital (ie. revolving credit, payroll, to refinance debt) or Fixed Assets (ie. to buy equipment, real estate). The application process is notoriously challenging, however, requiring extensive documentation. Approval rates are about one in four. Merchant Cash Advances (MCAs) are available based almost exclusively on the amount of funds flowing through your business bank accounts. Funds are generally issued as a lump sum and then the funding provider will make 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 the entire amount must be paid off in full regardless if the Merchant wants to pay it earlier than the scheduled term. Invoice Factoring is for businesses who need to fill the gap between invoicing for goods and services and receiving payment from their customer. A factor will essentially purchase the receivables via an assignment and in exchange will advance anywhere between 60% and 90% of the value of an outstanding invoice at the time it is billed to a customer. The invoice payment is then made directly to the factor, who will use it to repay the advance as well as cover the cost of any fees, then will send any remaining portion to the business. Work in Progress (WIP) Loans are available to businesses, typically in the manufacturing realm that need assistance purchasing raw materials to fulfill an order. Similar to Factoring, payment from the client then flows through the lender, who deducts the cost of those materials as well as any financing fees or interest, and then the remaining amount is sent to the business. Equipment Financing can take several forms, but there are two main types. One is Renting/Leasing, in which the business typically makes a down payment and then monthly payments for the ability to use the equipment for a set term while the owner is responsible for the cost of repairs or replacements. The other option is to take out an Equipment Loan, where a business takes title / ownership of that property, and therefore can depreciate the asset for a tax benefit but is also responsible for all other related costs. Equipment Loans often require a down payment and are then paid off in monthly installments depending on the expected lifespan of the equipment being financed.
Mobilization Funding’s Work in Progress Loan Program 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. Unlike other lending programs, Mobilization Funding is available for businesses before you invoice for products. With the capital you need on hand, you can:
- order raw materials
- make payroll
- negotiate better terms with suppliers
- function more smoothly overall