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Aug 2015

What is the Best Type of Loan to Get for a Manufacturing Company?

August 3, 2015
Capify Australia

Launching and running a small business is difficult and not at all inexpensive. Big money is needed to set up the enterprise and get it running, but also to maintain inventory and support the costs of operations as the business slowly gains ground. More often than not, there will be a need for additional funding once the business is launched, with the capital being absolutely necessary to keep the business moving in the right direction.

This is especially true for manufacturing companies. A manufacturing company requires huge capitalisation, regardless of the product involved. Apart from this, chances are that manufacturing companies rest at the top of the supply chain, where the competition is steep and the demand is very high. If a manufacturing company is unable to meet its market demand, there is a very real danger of the customer quickly changing suppliers, which may cause the owner his business or at least potential profits.

Usually, manufacturing companies will have to seek a source of funding to maintain their operations and support the business. This may come in the form of either equity financing – or selling part of the ownership to investors – or debt financing, or alternative lending.

Why Might a Manufacturing Company Need a Business Loan?

A manufacturing company may need to take out a loan for several reasons. First, the pre-operation costs of a manufacturing plant are great: the money required for the plant’s lease and land requirements, the construction of factory buildings, renovations and the installation of fixtures and equipment, and the purchase of equipment and initial inventory may prove too costly.

Add to that the daily operational expenses required, such as salaries, utilities, the maintenance or upkeep of the plant and equipment, the constant replenishing of supplies and inventory, distribution costs and many other similar cash-outs that require a constant inflow of income or a sizable operating capital.

Moreover, customers of manufacturing companies will most likely require or demand payment terms. That is to say, most of the transactions of a manufacturing company will likely be on an “on account” basis, which means that the company will be delayed in its cash receipts. There will be instances when the company will have to shoulder the costs for several months as the customers will be paying only after a given period.

Then the company might need a loan for its long and short term needs. Fortunately, business owners have the luxury of choosing from a slew of options in the financial market.

What Types of Business Loans are Available for Manufacturing Companies?

The financial market has really opened itself as a means of accessing funds. Apart from traditional sources – such as banks and credit companies – alternative lending has taken the industry by storm. Business owners today have more choices and more bargaining power, which translate to better ways of deciding what loan type to pick to suit the business’ needs.

As previously mentioned, traditional loans are term loans that affix an amortisation rate to be paid regularly. Credit card financing is similar to a term loan, except that the loan from a third party or company is charged against a credit card account and the credit card provider (normally a bank) will amortise the payments over 12 or 24 months.

For manufacturing companies, there is also a unique type of loan called equipment financing offered by traditional providers. This type of loan is akin to a car loan, which takes the equipment itself as the collateral for the debt. The company is able to use the equipment pending full payment of the obligation, which is again amortised over a fixed term.

For alternative sources of funding, there are several options to choose from. One of these is the Small Business Administration (SBA) loan, a government-backed type of loan wherein the government assures payment of a portion of the loan and makes it easier for credit companies or banks to grant the loan.

Still another is the merchant cash advance, a lump sum loan granted to business owners without a need for collateral, the payment of which is deducted regularly from a business’ credit card sales. The amount is usually a percentage of the sales instead of a fixed amount. Similar to this is an unsecured business loan which deducts from the customer’s bank account instead and offers options for renewal and refinancing after the original loan is paid.

Pros and Cons of Business Loan Types

The traditional types of loans are best for manufacturing companies given that they are better for bigger loan amounts. The payments are fixed which allow the owner to account for these in the monthly or yearly budget, minimising any risk of unaccounted expenses in the cash flow.

Equipment financing is a really good option for a manufacturing company in that it allows the business to operate without necessarily draining its bank account. This will allow the owner to use the original capital not to purchase the equipment but for more immediate needs of the company, especially during months with no collections.

The only downside to this is the fact that these providers usually have stringent application processes with low chances of approval, unless the company has been operating for several years already. Still, if the owner is able to secure one of these, the company can be set up quickly.

The alternative sources of financing offer a quick access to cash, ideal for one’s immediate needs, like salaries, maintenance and insurance costs and inventory costs. The SBA loan may be a good option for manufacturing companies, especially since government agencies are keen on supporting new businesses to boost the economy and employment.

The unsecured business loan may be the best option for pressing expenses given that it is approved very quickly.

How Do I Select a Loan Provider That Understands the Needs of Manufacturing?

The problem that most business owners have is the thinking that there is only one right loan type for them. Manufacturing company owners would do well to mix different options suited for its short and long-term needs.

Considerations like these are best addressed when the owner seeks the help of companies who want the best for the client, and whose years of experience have exposed them to the needs of the business owner. It is important to choose a reputable company that makes it their goal to help businesses, first and foremost, with their loan products reflective of their deep understanding of their client’s requirements.

How Should I Use My Loan Wisely?

Loans granted should be used efficiently to prolong operations especially when the clients have payment terms. The best way this can be done is to budget well and minimise expenses to make sure payments are absorbed. Creditors are business owners too, and if the manufacturing company owner is able to this, then he will be assured that the creditor will always be willing to assist him.

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