Which financing options make sense for manufacturing companies in 2021?

You have an order that you need to buy materials for.
You want to be able to take on larger orders than you are now.
You’re trying to recover after a tough year.
You need to handle slow paying customers.

These are probably the most common reasons for a manufacturer to require financing. It’s normal to need financing, but the problem is that access to financing is gated.

Banks require you to leverage a part of your business and often want to use your financial statements as a reason to provide you with financing.

For many businesses, it’s just not feasible. From bad credit scores to past issues to outstanding loans: There are plenty reasons why this doesn’t work for many.

But the most important reason is this:

Standard financing solutions only consider the value of your business, not the value of your operations or orders.

A more relevant solution

And that’s where alternative financing comes in.

Alternative financing allows you to leverage your operations, not your assets.

The choices you need to make depend on the situation you’re in and what stage of the process you’re trying to leverage.

So, what are your options? Read on to find out.

Don’t want to read the whole thing? Use our handy tool to find out which financing options are relevant for your business. What are my options?

Depending on your situation , your options can divided 3 categories:

1. Before the product is finished
You have an order (or multiple) that you need to fulfill, but you still need to produce the product. If this is your situation, go to section 1.

2. After the product is finished
You have an order that you need to fulfill, and the product is already finished OR will be produced by someone else. If this is your situation, go to section 2.

3. After the product has been delivered
Everything is done and you’re just waiting for payment. If this is your situation, go to section 3.

Before the product is finished


Common problems:

You have an outstanding order but lack the financial resources to purchase the base materials.
You have a new customer that you can’t take on at the moment because you’re waiting for payment.
You want to take on larger orders to grow your business can’t don’t have enough funds to take action.

Both growth and survival require the funds to take action. With each of the cases above, taking action is exactly what you’re trying to do.

Most importantly, “before it is finished” means that even when the base materials you use can be sold separately but still require assembly by your company to create your product.

If you’ve read about purchase order financing before, you’ll see that this is a key problem it has when it comes to manufacturing companies.

For this reason, manufacturing companies will often have to look elsewhere: Work In Process financing.

Work in process financing: How to qualify

If you have never heard about it, you’re certainly not alone.

Work in process financing requires the financier to have a thorough understanding of the average manufacturing process. After all, part of the “risk” associated is the manufacturer’s capability to deliver the product.

Interestingly, work-in-process financing can also cover other aspects of finishing the product. Depending on the situation, things like labor costs, freight, and other expenses can also be covered.

And that’s also what makes this such an effective fit for manufacturing.

For the qualification process, the following items are typically considered key:

  • Product type: Different products have different markets and that also means a different value and risk attached to the products.
  • The manufacturing process: It is critical that your company is able to deliver the product with a high enough quality to satisfy the customer. That is exactly why the manufacturing process is part of the qualification points and why it requires a financier who understands manufacturing.
  • Customer Credit worthiness: The customer has to be able to pay for the products once delivered. This usually means they must pass a credit check.

Would your company be able to use work in process financing? It depends, and highly complex products are often hard to work with. You can use this mini-tool to see if your company could make use of work in process financing, or not.

After the product is finished


Common problems:

Inventory is available and you just don’t have the financial capacity to handle shipping at the moment. You’re using a different company to produce your stock and you have a contract in place that you can leverage.

Each of these scenarios are common among manufacturers and put them in a unique situation where they can leverage either something they’ve already produced, or an existing relationship (the supplier).

Inventory financing

When a business has inventory laying around, available, or made to order, but for some reason needs funds to move the inventory, inventory financing is a great option.

With this financing strategy, you use the inventory itself as collateral.

For the qualification process, the following items are typically considered key:

  • Product type: Different products have different markets, if you’re in a niche market, the risk is more significant because it is harder to find a new customer to buy the inventory.
  • Customer Credit worthiness: The customer has to be able to pay for the products once delivered. This usually means they must pass a credit check.

Purchase order financing

In this case, you leverage the order, and not your inventory. This means that you are, in fact, leveraging your customer and the process of the sale with less focus on your own company.

That makes this a very effective financing approach, but there’s a catch: To minimize the risk, purchase order financing or purchase order lending is usually limited to companies or transactions where the product is produced by someone else.

This is a measure to minimize risk on behalf of the lender since the responsibility is then offloaded to the existence of a contract with a third party.

Of course, for most manufacturers, purchase order financing is not very relevant.

Instead, for companies who DO produce their own products, work in process financing is a better alternative.

For the qualification process, the following items are typically considered key:

  • Product type: Different products have different markets, if you’re in a niche market, the risk is more significant because it is harder to find a new customer to buy the inventory.
  • Customer Credit worthiness: The customer has to be able to pay for the products once delivered. This usually means they must pass a credit check.
  • Your supplier and the supply terms: Your supplier HAS to deliver according to the contract. That makes it the perfect additional security measure and a very common qualification requirement.

 

After the product has been delivered


Everything went well with the sale, but at this point the reality of business sets in.

Especially for manufacturers who deal with government or large businesses, this is a very recognizable scenario:

Your product has been delivered and payment is due. In the meantime, your business is ready to move to the next. But that means you need operating income.

The problem is: Customers don’t always pay in time.

What do you do?

Well, this is a situation that happens to almost every single business out there. There seems to be no real way out, unless you consider financing.

This is where factoring comes in.

With factoring, you literally leverage the value of your outstanding invoices. What’s more is that the factor will often make funds available in less than 2 days after the invoice has been sent.

For the qualification process, the following items are typically considered key:

  • Invoice Amount and terms: Logically, the terms of payment will affect the ability to factor your invoice significantly.
  • Customer Credit worthiness: The customer has to be able to pay for the products once delivered. This usually means they must pass a credit check.
Not entirely sure what may work best for your company? Use our handy tool to find out which financing options are relevant for your business. What are my options?

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