Manufacturing funding: machines that last a decade, materials bought before the order ships

Manufacturers are rarely short of orders when they're short of cash. They're short because materials, labor and machine time are paid for before the finished goods ship, and customers pay on invoice terms after that. The fix is two separate tools: long money for machines, revolving money for the cycle.

The cash-flow shape of a manufacturer

Follow one order through the plant:

1. Materials. Raw stock is bought, often in minimum quantities, sometimes with deposits or prepayment to the supplier.
2. Production. Labor, energy and machine time are spent while the goods are made.
3. Shipping. Freight goes out.
4. Invoice terms. Business customers commonly pay on terms, weeks after delivery.

The bigger the order, the longer and deeper that gap. A large new contract can be the most dangerous moment for a manufacturer's bank balance.

On top of that sits the equipment cycle: CNC machines, presses, molds, packaging lines and the buildings to house them. These are big, planned purchases that earn for years.

Which funding fits, and which doesn't

SBA 504 loans finance major fixed assets, including real estate and machinery with a useful remaining life of at least 10 years. They can't be used for working capital or inventory. SBA 7(a) loans can cover working capital, machinery and equipment, and real estate, through a participating lender. Neither is fast, but for a plant or a major line they're often the cheapest route.

The IRS also lets businesses elect a section 179 deduction instead of depreciation for certain property. Your accountant can tell you whether, and how much, it applies.

A merchant cash advance rarely fits a manufacturer: few card sales, lumpy business-to-business receipts, and a price built for short-term risk.

What it costs: a worked example

Say you finance a $200,000 machine at 18% APR over 24 months, paid monthly.

• The payment is $9,984.82 a month.
• You repay $239,635.68 in total.
• The interest is $39,635.68.

That's double our standard example of $100,000 at 18% over 24 months ($4,992.41 a month). A longer term on long-life equipment brings the monthly figure down, though you pay interest for longer. Your own quote's rate may be higher or lower than 18%. Use the payment calculator on this page with the rate and term on your actual quote.

Now compare $200,000 as a cash advance at a 1.35 factor over 6 months, paid daily: $270,000 back, about 126% APR. For a machine that runs for a decade, that's the wrong tool.

Sterling's take: match the term to the asset. Long machines, long money.

What funders typically ask a manufacturer for

• Business bank statements for recent months.
• Financial statements and tax returns, especially for larger or SBA loans.
• An accounts receivable aging report and a list of major customers.
• Open purchase orders or contracts for the work you're funding.
• For equipment: the vendor quote, and whether the machine is new or used.
• A schedule of existing debt and equipment already financed.

Our funding partner's programs suit manufacturers trading 12 months or more with about $80K a month in deposits, an owner credit score of 600+ and no more than two loans or advances running.

Red flags specific to manufacturing

1. Customer concentration. If one customer is most of your sales, a funder sees one point of failure, and so should you. Funding a big ramp-up for that customer without a firm contract is a bet.
2. Short money for long machines. A machine that pays for itself over five years can't service a repayment set for six months. The plant ends up borrowing again to make the payments.
3. Leases with heavy end-of-term costs. Some equipment leases quote a low payment and a large buyout or return condition. Ask for total cost to own, in writing.

Before you sign

Write down your cash cycle in days: materials paid, goods shipped, invoice paid. That number tells you how much revolving money you need and how long you'll carry it.