On a global scale, the manufacturing industry has numerous challenges to face in the current economic state. With multiple factories closing, labor disputes and negotiations on wages, as well as drastic shifts in foreign markets causing necessary staff reductions, companies in manufacturing can find it difficult to keep up with operations and the vast costs that are necessary to sustain efficient productivity.
Currently, the biggest realities for the manufacturing industry that may be cause for concern include:
- Rising costs for employers, directly related to uncontrollable expenses
- The potential to become overwhelmed with regard to big data management
- Gross margin loss due to increasing prices
- Challenges inherent to moving inventory
It is important for manufacturing businesses to intimately understand these challenges as well as ways to raise the necessary capital to ensure operations remain fluid.
Rising Costs for Employers
Even when manufacturing companies are diligent in making the right, budget-conscious decisions with internal expenses, there are external cost factors for which companies have little to no control over that can cause a great deal of financial upset. Required expenses, such as property taxes and required insurance coverage can change with only a moment’s notice, making it difficult for manufacturers to keep up with the daily cost of operation and employee payroll. Additionally, worker’s compensation insurance and subsequent claims can cause disruption in an otherwise consistent cash-flow schedule. These rising employer costs can present an urgent need for an influx of working capital in a hurry.
Data Management Obstacles
Contrary to popular belief, manufacturers are not immune to the challenges faced by other industry-specific companies as it relates to data management. As technology continues to improve in other sectors, manufacturers – those who are the backbone to economic growth – are challenged with how to keep up. Old school systems are no longer efficient enough to keep up with the massive amount of data that is in play on a daily basis, including invoice and inventory management systems. Each of these management tools is necessary to maintain the consistent, efficient operation of all manufacturers, but it can be difficult to ensure each system communicates with the other. Upgrading to adequate data management systems can be just as costly as upgrading facility or equipment needs, and as such, manufacturing companies may need to consider different financing options before an upgrade can take place.
Loss of Gross Margins
In a recent report released from ISM, the price of doing business in the manufacturing sector continues to rise. Over the course of the last year, the majority of manufacturers have reported that prices have gone up steadily for the material needed to produce the goods consumers need and want. As manufacturers lose ground on gross margins, it can become difficult to remain profitable, even as more customer orders flood in. Companies may need to be prepared to strategically increase sales, which could lead to a need for working capital in order to sustain inventory levels and the potential to bring on new hires.
Throughout the history of the manufacturing industry, inventory movement has been a major concern, especially those focused within cyclical or highly seasonal sectors. When inventory sits on the floor without being sold, only two options exist: drastically reduce prices to unload it quickly or hold on to it until it can be sold at the original price point. Both scenarios equal lost revenue for manufacturers. Small and midsized companies in the manufacturing industry face an even greater challenge when inventory is stagnant, as it can seriously impede already tight cash-flow and the ability to produce new products as orders come in.
The realities facing manufacturing companies in the current economic state present the greatest impediment to working capital, no matter the size of the company in question. In order to effectively thwart the long-term negative implications that hasty decisions surrounding raising capital can rain down on a business, owners and management must be keenly aware of the financing options available and their costs.
The most well known type of lending for manufacturers and other small to mid-sized businesses is traditional lending via bank or SBA loans. This type of financing can be either secured or unsecured, with the business in relationship with the bank deciding which method is most cost effective. Loan repayments can be drawn out over time as opposed to other types of financing options which may require more rapid pay back.
Although loans can seem like a simple option for businesses in need of capital, there are a handful of caveats. First, banks as well as the SBA have incredible if not near impossible lending standards. Most companies won’t qualify for a traditional loan that is not backed by some sort of collateral, and loans are not typically granted for working capital funding. Additionally, unsecured loans are only offered to those businesses that have had successful operations for a long period of time, typically over two consecutive years. Companies should be aware of these issues prior to going to a bank or the SBA to obtain financing for any project.
Overdraft Credit Lines
For day-to-day operational capital, overdraft lines of credit can be a lifesaver. These credit accounts offered mainly through banking institutions work just like a personal overdraft credit line, allowing businesses to spend more than what is in the primary checking account. There are fees associated with carrying forward any balance on an overdraft line of credit, however, based on the interest rate granted at time of application. Most businesses can only qualify if they have a clean credit history and a long-standing relationship with their bank. Also, overdraft credit lines may have much lower limits than other comparable options.
Invoice Discounting / Receivables Financing
Invoice discounting or receivables financing can be a viable option for funding shorter-term working capital needs, as it is a form of secured financing. For companies that operate in highly cyclical or seasonally affected sectors, invoice discounting can help free up cash that is otherwise tied up with debtors. Manufacturers are able to release a portion of cash tied up in invoices – typically up to 80% of the invoice value – while still maintaining control over collection of future payments. The credit that is offered for invoice discounting is generally provided by a bank, and credit use increases and decreases with the ebb and flow of outstanding invoice totals. The interest charged on this type of credit line can be high, however, given the potential for future default or inability to collect on debts owed.
Financing can be difficult for those companies that are new, growing rapidly, or do not have perfect credit, and as such, some banks as well as private companies will offer factoring as an option for raising working capital in a short period of time. Factoring allows manufacturers to sell a portion of outstanding debts at a discount in turn for funding. Once this is complete, the buying bank or company has more control over collecting those outstanding debts, in comparison to invoice discounting. However, factoring can be an expensive option for already cash-strapped businesses, and not every size company will qualify for this type of financing.
As an alternative to traditionally pricey or hard-to-get financing for working capital, crowdlending has become an attractive option for some businesses. This innovative financing solution provides crowd-sourced, competitively priced, flexible working capital for growing businesses that may not meet the strict requirements of the aforementioned options. Here’s how it works: similar to crowdfunding for new products or start-up companies, crowdlending encourages accredited investors to participate in providing lower interest rate financing, secured by some kind of asset in most cases (accounts receivable or future contractual revenue in P2Binvestor’s case). Commercial businesses such as manufacturers, have the opportunity to access between $100,000 and $5,000,000 in flexible credit lines, expert management in invoice collection, and acceptance of up to 180-day payment terms.
Because crowdlending utilizes a crowd of sophisticated investors, risk is dispersed, and rates are often much lower than other alternative financing options. Although there are still stringent credit requirements in place to mitigate risk for investors, underwriting for crowdlending involves taking a holistic look at an applicant’s company, and businesses can be quickly qualified to obtain the working capital they desperately need.
The realities that manufacturing companies of all sizes face are unavoidable as the economy grows and prices continue to soar. However, businesses have the opportunity to acquire funding for working capital and expansion projects through a wide array of financing options. In order to be the most cost effective when taking on new credit lines or selling away invoices or receivables, companies must understand the risk involved with each option, as well as the cost for short and longer-term financing.