While the current economic expansion is the longest since 1900, one survey shows that two-thirds of manufacturers are preparing for an economic downturn. The 2019 Manufacturing and Distribution Report, by Sikich, shows that while only 27 percent believe we will enter a recession in the next 12 months, 63 percent are preparing for an eventual downturn.
Lining up alternative financing is smart — even if cash flow isn’t an issue now, it can quickly become one. Consult with your financial professionals to make sure you choose the right option for your business.
Alternative financing addresses an important stage in a company’s life cycle, funding a portion of the economy that banks cannot service because of federal regulations.
Alternative financing can be beneficial for companies:
• With limited profitability, losses and not much equity
• With valuable assets, such as accounts receivable, inventory or equipment with resale value, and a consistent revenue stream
• That don’t qualify for traditional bank financing
Examples of alternative financing options
1. Factoring. Your company sells your invoices to the factoring company, which then advances you an amount against the invoices immediately. The factor notifies your customers that they’ve purchased the invoice and instructs customers where to send payment. The factor receives payment for the invoices and remits the balance (the reserve) back to you, taking out its fees and charges. Factoring generally takes only a few weeks to put into place and works for companies with good receivables and creditworthy customers. Although the pricing is higher than a traditional bank line of credit, a factoring facility can be more flexible and grow with a fast-growing company.
2. Purchase order financing. Purchase order financing often goes hand-in-hand with factoring. Imagine that you import paper towels and you get a big order from a large national retailer, but you don’t have the money to get that into production. A purchase order finance company puts up a significant portion of the purchase price for the finished goods and pays your supplier, but they often want to work with a factoring company so they can be paid through the factoring company as soon as the inventory ships to the customer.
3. SBA loans. SBA loans are specifically for companies that do not qualify for bank financing. Banks make SBA loans, which the federal government guarantees up to a certain percent. SBA loans range from relatively small up to $5 million and feature long amortization — 10 years for a working capital loan and 25 years for a commercial real estate loan. The interest rates are also very attractive. SBA loans are for specific purposes, and they may require a down payment. The application, documentation and approval process can be extensive; however, working with an SBA Preferred Lender should help smooth out the process.
4. Asset-based loans. An asset-based loan is made specifically against your receivables, inventory or equipment. You provide an asset-based lender weekly or monthly borrowing bases and then they lend based on the asset formulas in those reports. The lender may require you to provide CPA-prepared financial statements as well as either reviewed or audited statements. While the interest rates are lower, you must provide a lot of information to the lender. These loans can range between $3 million and several hundred million dollars.
5. Equipment finance. These are loans against your equipment — say it’s worth $100,000, but in a resale, it would only be worth $60,000, so the lender loans you $50,000. You repay the loan monthly and usually get amortization between three to five years. If something goes wrong, the lender may try to repossess that equipment, so make sure you can repay the loan before you sign the paperwork.
Before signing any paperwork, make sure to evaluate the costs and benefits fully with your financial professional. It is important to investigate the financial strength and track record of any alternative financing provider. Also, it helps to look for a financing partner with longevity and industry expertise so they can potentially help with ideas they’ve seen work in other businesses like yours.
To hear more about alternative financing for manufacturers, attend my special presentation, “How & Why Alternative Financing Works for Manufacturers,” at Manufacturing First on Oct. 30.
Bill Elliott has 35 years of experience in commercial finance, with experience financing a variety of companies ranging from startups to publicly traded entities. He is an expert in asset-based lending and factoring. In addition to his lending expertise, Elliott also has entrepreneurial experience, owning a company and successfully raising $1.5 million in seed capital and $10 million in preferred equity and senior financing.