Manufacturing isn’t just an important sector of the U.S. economy, the manufacturing sector is vital in that it contributes $2.1 trillion to the U.S. economy, with a multiplier effect of 1.37 (for every $1 spent in the manufacturing sector, the benefit to the overall economy is valued at $1.37).
When you look at the facts about manufacturing, the sector accounts for nearly 12% of G.D.P, manufacturing businesses in the U.S. contributed $2.09 trillion to the economy in fiscal year 2013 (an increase of nearly 15% since 2009) and accounts for 1/6 of all U.S. private sector jobs by employing over 17 million people in the sector. Thanks to U.S. manufacturers being the most productive in the world, the average U.S. manufacturing worker earned nearly $15,000 more than the average worker in all other industries.
With the aid of manufacturing assistance, growth in the manufacturing sector continues to grow, having shown a 5.6% increase in real growth in October 2015. Some of this may be reflected in the fact that the trade deficit decreased significantly, as the manufacturing economic update in November 2015 shows the trade deficit shrinking from $48 billion to $40 billion.
What is Manufacturing?
Manufacturing is commonly defined as the commercial production of raw material materials are made into finished good, business merchandise, or components of more advanced products, through the use of machines, tools, chemicals and/or human labor.
Why Would Manufacturers Need Financing?
- Purchase business real estate
- Refinance commercial real estate
- Refinance business debt
- Consolidate commercial loans
- Manufacturing acquisition financing
- Working capital
- Equipment purchase and financing
- Finance payroll
- Manufacturing Expansion
Loans Options for Manufacturing Companies
There are a full-range of debt financing options for manufacturing companies, including SBA loans, conventional bank loans, private-investment banks, factoring, equipment financing, purchase order financing, mid prime alternative loans, asset-based financing and business cash advance financing.
Below we are going to look at the various options available to help manufacturing companies meet their financing needs.
Bank Loans for Manufacturing
Traditional banks (including small banks and community banks) offer some of the best financing options to manufacturing companies, being their rates and terms are usually the most desirable of all lenders.
Banks offer a number of traditional financing products including term loans, lines of credit, commercial real estate loans, and equipment financing on both a fixed rate and variable rate basis.
But being that these loan programs are the best of the best, the banks tend to only look to fund manufacturing companies that offer the least risk (meaning they generally only fund manufacturing businesses that have good cash-flow, good history of paying debt, and sufficient levels of collateral).
- Bank manufacturing loan rates: 6-10%
- Bank manufacturing loan terms: 3-25 years
SBA Manufacturing Loans
SBA loans allow manufacturing companies that may not be able to secure a traditional bank loan the ability to obtain bank-rate financing. SBA loans are originated by SBA lenders — not the Small Business Administration itself — but the loans are backed by the U.S. government, which covers a large portion of the business lenders’ losses should the borrower default on the loan.
With the importance of manufacturing to the country’s overall economy, the SBA realizes that access to capital is crucial. So the SBA absorbs are large portion of the lenders’ losses to try and encourage the lenders to provide funding to companies that may have been been denied financing by the bank because of risk.
- SBA loan rates: 6-8%
- SBA loan terms: 7-25 years
Alternative Loans for Manufacturing Companies
With bank-rate financing having become very difficult to secure after the financial collapse, alternative lenders have stepped into the commercial lending space, and have provided many financing solutions to companies that wouldn’t have been able to obtain traditional financing otherwise.
With a focus on a companies cash-flow (and not necessarily the credit history) alternative lenders are able to get very creative with their financing solutions, over thousands of differing (and often competing) products.
There is a catch, though: because of the lower credit requirements than banks, alternative loans have higher rates and shorter terms than banks. With that having been said, alternative lenders are able to fund much faster and require less paperwork and documentation than traditional financing lenders.
- Alternative loan rates: 8-30%
- Alternative loan terms: 1-5 years
Equipment Financing for Manufacturing
Equipment financing for manufacturing companies allows manufacturing businesses to obtain needed new and used equipment and machinery without paying the full cost of the machinery upfront.
Equipment lending companies will generally purchase the equipment the company needs, and then leases the equipment to the manufacturing business for a set term. At the end of the term, the manufacturer will be provided the option to purchase the equipment, continue leasing the equipment, or simply let the equipment go.
- Equipment leasing rates:
- 5-15% Equipment leasing terms: 1-7 years
Invoice Financing for Manufacturers
Invoice financing (also referred to as “factoring”, “invoice factoring”, “invoice discounting”) is the sale of a company’s unpaid invoices to a factoring company at a discount.
The lender (of factoring company) will purchase the invoice, and forward the manufacturing company between 70-92% of the invoice to the selling company, and retain a fee for themselves. Each week that the invoice goes unpaid, the factoring company will charge the business a fee (usually around 1%). When the invoice is finally paid in full, the factoring company will then forward the remaining balance to the selling company.
- Invoice factoring rates: 1-2% weekly