Financing For Machine Shops
We all use endless amounts of products on a day to day basis, but never really think about who makes those products and the skilled and lengthy process it entails. A machine shop is essentially a facility with heavy duty manufacturing equipment that is used by a machinist. In a machine shop, new parts are created through the use of the variety of equipment in a machine shop, as well as existing equipment and parts being repaired. Some of the equipment created and repaired in a machine shop include cars and car parts, aircraft parts, large engines, hand tools, and manufacturing equipment, as well as day to day household products.
The manufacturing and metal fabrication equipment utilized in machine shops varies depending on the type of products a machine shop creates and repairs, but typically a machine shop will have three basic forms of manufacturing equipment: machines that create specific items, machines that assemble these specific items, and machines that aid human operators, or machinists, in creating, repairing, and assembling those items. The manufacturing equipment needed in machine shops comes in a variety of styles and configurations because there is usually a specific task or product being created, which varies from machine shop to machine shop.
To make a machine shop successful, a machine shop owner also has quality, skilled laborers known as machinists. A machinist sets up and operates a variety of computer-controlled and mechanically controlled manufacturing equipment in order to produce or repair a specific product. Typically, a machinist works very long hours, leading to expensive overtime pay and evening and weekend work. While a basic machinist position does not require higher educational degrees after high school, those who wish to do well and continuously grow in a machine shop should have more education and degrees. To be a qualified machinist, most machine shop companies require a lot of on the job training, specifically through an unpaid apprenticeship program, in conjunction with good math skills and machine operating skills. All of these specific qualifications for the machine shop industry have played a role in the decrease in available skilled laborers, resulting in machine shop business owners having to pay their employees more and more every year.
Machine Shop and Fabrication Statistics
In the past five years into 2016, the machine shop services industry has drastically expanded and seen positive revenue growth that is expected to continue for the next few years. This growth is a direct result of the increased demand for the machine shop industry’s major markets, such as commercial aerospace and transportation manufacturing. Another benefit to most machine shop business owners is that the United States machining industry is highly fragmented, meaning the 50 largest companies only generate about 10 percent of the total revenue. In September 2016, the machining industry also showed that there is growth and expansion in the United States for the 88th consecutive month! These are optimistic percentages for smaller machine shops, however many machine shops are still recovering from the 2008 recession that resulted in a major number of layoffs in the machine shop industry. While there are still many machine shops that are still trying to rebuild their businesses, there is still many positive trends taking place in the machine shop industry that should leave many business owners with high expectations, assuming machine shop business owners are willing to take the necessary steps to compete in this competitive market.
Trends for Machine Shop and Metal Fabrication Industry
To understand the major implications, expectations, and trends for 2016 and the upcoming years in the United States for the machine shop industry, we must first look at the global trends that have been happening within the machine shop industry. (LINK3)Overall, projections for the machine shop industry on a global level are looking optimistic, with an expected annual growth rate of 5.5 percent through 2019. The total global market is expected to reach over $181 billion by 2019 for the machine shop industry, however over 30 percent of this is expected to be largely due to China and other developing Asian nations. This is predominately due to the cheap labor that multinational corporations are using to reduce machining costs and to maintain, or increase, profitability. This increase also correlated with global financial institutions creating massive amounts of debt. With these two factors in play, Asia essentially devalued their currencies, resulting in their products being cheaper on the world market. These factors facilitated the creation of many new factories throughout Asia. While these trends allowed many United States based companies to outsource their machining needs, leaving many machine shops in the United States with little work, there are specific trends forming today that will change this.
The number one factor influencing the machine shop industry is machining tools. As mentioned above, many corporations have outsourced their work in the past, leading to more and more machine shops and factories throughout Asia, as well as a significant increase in spending on machining equipment. The downsides of cheap labor resulted in these companies purchasing cheap machining equipment, or even just the wrong kind of equipment for their needs. Now that the financial and demographic trends listed above have started to even out in the past few years, machine shops around the world are competing primarily on capability and quality – a major advantage for American machine shops. Many Asian and European companies have seen a drastic decline in the purchase of top of the line machining tools, leading to a major opening for United States machine shops to get ahead.
Purchasing these advanced machining tools and staying ahead of all the other major competitors in the machine shop industry is vital today, but to stay on top a machine shop business owner needs capital. It can be difficult to acquire enough expendable money when competing with machine shops in other countries who have less fees and cheaper wages to pay. There are a variety of financing options available to machine shops that need a little extra help to get their business to the top of the machine shop industry
Why Would a Machine Shop Need Financing Options?
- Equipment is the number one focus of every machine shop today – none of which is very cheap. These machine tools include 3D printers, drilling, boring, tapping, threading, milling, and grinding machines. Whether your machine shop business is looking to replace old equipment or simply add a new type of equipment to your production line, equipment financing options can help make this necessity happen.
- Employee training is vital in this specialized field. Many machine shop business owners are struggling to find the right employees for their machining positions. Many employees are willing to put in the work to earn these skills and qualifications that are required for the machine shop industry, however affording these on their own can be almost impossible. For those machine shop owners who are willing to pay for specialized certifications and on the job training, financing and loan options can be an option to help fund these ventures.
- Payroll is unavoidable in any industry, however with the machine shop industry, employers are being forced to pay higher wages for quality workers. The lack of available workers in this machining field have led to an increased demand for better pay, resulting in payroll necessities that can be hard to cover during slow seasons. There are always quick financing options available for emergency situations like these, such as merchant cash advances.
- Work space and rent are also priorities in the machine shop industry – priorities that can be too expensive to cover during rough times! Reviewing the variety of financing and loan options available to your machine shop business could help.
- Expansion is always an option in a booming machine shop industry. Many of the current machine shop industry trends are allowing many machine shops to contemplate this business venture. Having options for financing can be an asset during the expansion process.
- Specialized services especially if you are a smaller machine shop business, can help your machine shop compete and thrive in this industry. However, affording specialized equipment like 3D printing, training, and other things can be difficult. There are always financing and loan options available to your machine shop that can allow a smooth transition into a more specialized niche.
Types of Machine Shop and Metal Fabriction Loans
| Types | Rates | Terms | Funding |
|---|---|---|---|
| Bank | 6-10% | 3-7 years | 14-30 days |
| SBA | 6-10% | 3-7 years | 10-30 days |
| Line of Credit | 5-15% | 1 – 3 years | 7-30 days |
| Alternative | 6-25% | 1-5 years | 5-7 days |
| Cash Advance | 1.16-1.55 | 3-24 months | 1-3 days |
| Invoice Finance | 1-2% weekly | 1 – 90 days | 1-3 days |
Machine Shop Bank Loans
The top choice for business financing is almost always a traditional machine shop term loan and/or a machine shop line-of-credit. For a small machine shop that has good credit and solid revenues and profitablity, a traditional loan is the first place to look.
- Rates: 5-10%
- Terms: 1-25 years
Machine Shop SBA Loans
SBA machine shop loans are the next best financing option for small businesses that are unable to get a traditional loan. The difference between a traditional loan and SBA financing is the fact that the Small Business Administration agrees to cover much of the SBA lender’s losses if the machine shop defaults.
- Rates: 6-8%
- Terms: 3-25 years
Alternative Machine Shop Loans
Alternative machine shop loans don’t have the fantastic rates of traditional or SBA funding, but offer borrowers with decent credit and cash-flow access to needed capital in a relatively short period of time (days not weeks).
- Rates: 8-25%
- Terms: 1-5 years
Asset Based Machine Shop Loans
Machine shop asset based loans allow small shops and their owners to use equipment or real estate as collateral to help obtain business funding. Real estate used as collateral can be both commercial and/or residential.
- Rates: 10-20%
- Terms: 1-5 years
Machine Shop Cash Advance
Machine shop cash advances aren’t actual loans to the small shop, but are the sale of the machine shop’s future receivables (either credit card processing or bank account deposits) in exchange for upfront cash funding.
- Factor rates: 1.16-1.50
- Terms: 3-24 months
