When you hear the term “manufacturing” or think about businesses built around manufacturing, the first images which pop into your mind are probably of huge factories, massive assembly lines, multi-million-dollar automation, and some unfathomable quantity of products output each and every day. And, to be fair, there are still important manufacturers operating on that scale both in the United States and beyond.
Manufacturing and Small Business Ownership
But not all manufacturing is done on such a massive scale. As you drive past industrial parks or wonder what exactly goes on inside those giant metal buildings alongside the highway as you’re heading to Grandma’s for the holidays, you may be looking at the backbone of American manufacturing. These are small businesses whose primary function is creation of tangible items. They’re often locally owned. Most have closer to a dozen employees than a hundred. And they tend to be fiercely devoted to doing right by those on their payroll.
This sort of manufacturing requires substantial investment of time and money. Not to mention absolute dedication on the part of management and ownership. At the same time, it operates in an economy with no guarantees from one season to the next just how things are going to go that year. They may have a company truck or two, but they probably don’t have private jets. And they certainly don’t have corporate offices around the world. It’s a good bet the boss knows how to fill almost any role anywhere in the building. And has – often on short notice.
It’s also very likely they rely on manufacturing loans periodically to get through the rough spots.
I knew a family in Oklahoma who were millionaires several times over. The husband had innovated some sort of labeling machinery. They ended up slapping ingredient lists and bar codes on baked goods for a national grocery chain. And still they couldn’t keep up with the windfall. I never fully understood it, but it never ceased being amusing hearing the wife express her bewilderment at how suddenly things had turned around.
Why Would Manufacturers Need A Loan?
Most small businesses encounter numerous situations in which the right financing can be the difference between long-term prosperity and becoming another tragic entrepreneurial statistic. Manufacturing loans help owners deal with common small business challenges, as well as some unique to their situation. Here are a few of the most common reasons even a successful manufacturer might want to loan shop.
1. Starting a New Business
This one is a bit of a no-brainer. Obviously, it would be nice to think that the average entrepreneur (if there is such a thing) could simply save up twenty thousand dollars or so (or five times that, or ten times that), then buy themselves a manufacturing facility and hire a dozen or so reliable workers. Easy peasy, right?
But it doesn’t usually work that way. Most of the time, starting a small business that requires a major investment in facilities or equipment means securing a start-up loan of some sort. This requires some serious preparation. Lenders will want to know about your personal credit history and current credit rating, but also about just what it is you think you’re going to do with all this money that will allow you to pay them back consistently.
There’s not necessarily a major distinction between a small business start-up loan and a personal loan. It depends on your credit history and the nature of the business you’re wishing to establish. While manufacturing options usually require major funding, other sorts of small businesses may allow you to gradually build. Perhaps starting part-time or working out of your home until things start to take off. If the business loans you consider don’t look right for you, consider some of the flexibility of personal loans online instead. They might end up being just what you need.
Personal loans often require less paperwork, and with a decent credit history may secure you a lower interest rate. They are at the very least worth considering if you’re looking to start your own business.
Where to Look
If you’re considering applying for start-up financing, start by exploring the variety of loan places available in the 21st century. Visit several local banks and credit unions and talk to representatives there about your options. Then, consider reputable online lenders, many of whom specialize in unusual circumstances or personal loans with less-than-perfect credit. Because we realize that it can be a bit daunting to navigate the options on your own, connecting you with legit lenders willing to explore options with you is a central feature of what we do. We’ll never charge you for making a few introductions, and we don’t loan money ourselves or have a stake in whether you decide to borrow the money or not. We just want to make sure you have valid options.
You’ll want to check your own credit report to make sure there are no errors or surprises. You should also prepare a business plan, including at least a general breakdown of start-up costs, what you expect in the first 3-5 years, and at what point you believe it’s realistic to begin showing a consistent profit. It’s nice if you can produce recent market analysis related to whatever it is you’re going to produce, along with whatever personal research you’ve done on conditions in your area.
You should also be prepared with personal tax returns, any tax returns from previous businesses, and anything else that shows you know what you’re doing and aren’t just stepping out on a wing and a prayer. Becoming an entrepreneur certainly requires risk, and an abundance of self-confidence, and sometimes even defying the statistics, but those things are on you. Your lender wants to see evidence that you’re very likely to be both willing and able to repay manufacturing loans or any other sort of small business loan or personal loan you may be pursuing.
2. Equipment Loans
Manufacturing is an inherently equipment-heavy type of business. Machinery requires maintenance. And very likely, you must upgrade or replace it from time to time in order to stay competitive. In the same way any small business must have a reliable network of phones, computers, and related communication, manufacturers have to be able to manufacture high quality products with reliable equipment.
The best equipment loan can help spread out the cost of this sort of investment over a manageable time frame. Depending on the nature of the business, the equipment itself might serve as collateral, making it easier to secure the loan on favorable terms – especially a reasonable interest rate. On the other hand, failure to keep up with payments could lead to the lender repossessing the equipment so purchased. They don’t want it, you understand – they’re not in the manufacturing business. They’d rather be repaid. But it can and does happen, so be realistic going in when considering these sorts of manufacturing loans.
3. Invoice Financing
Most manufacturers sell in bulk to clients who then use or resell the items being made according to their own business models and schedules. This can mean large volumes of product going out the door in exchange for… invoices. Payment schedules. Promises, essentially.
That’s not always a bad thing. When times are good, it may all balance out as payments roll in throughout the year. But for smaller scale manufacturing, there are often periods of famine offsetting weeks of feast, while most monthly obligations remain the same. Employees need to be paid whether money is coming in or not. The electric bill has to be paid, and insurance kept current. It can be challenging for the small business owner to juggle the available resources.
Invoice financing – sometimes called accounts receivable financing – is a special type of loan in which the lender essentially purchases your outstanding invoices. They provide a percentage of what you’re due up front (usually 80% – 90%) and receive their payment when the invoices are resolved.
On the one hand, you’re essentially paying a third party for faster payment on money they owe you anyway. Without careful negotiation of fees and percentages, this is the sort of thing which could quickly cut into essential profits. You don’t want to get in the habit of running your business through a repeated series of payday loans!
On the other, paying for flexibility and faster access to funding is what most small business loans are about in one form or another. Cautious use of invoice financing can help your company stay nimble and keep your employees happy – not to mention keeping the lights on!
4. Revolving Credit
This is one of the most flexible forms of loan available to small businesses, including those used as manufacturing loans. In some ways, it operates like a business credit card. You apply for a “line of credit”. A theoretical loan amount you don’t have to actually borrow at the time of application. Working with the lender, you agree on a maximum loan amount, interest rate, and other terms. At this point you now have an amount of money available to you. You can access it when you need it and pay back according to the pre-arranged agreement.
The nice thing is that you don’t have to take out the full amount up front, unnecessarily raising your monthly repayment or costing yourself interest on money you don’t need right at the moment. You can use the funds as necessary and only pay back what you’ve taken out. At the same time, the full amount is available quickly and without additional fuss, making access extremely convenient and flexible for you. In manufacturing, that can make all the difference.
5. Seasonal Financing
If you’re in the business of manufacturing something that sells seven times more in the spring and summer than it does during colder seasons, it may be helpful to secure seasonal financing to get you through those winter months. This is particularly appropriate if you know with some confidence that sales and profits will be there at a certain point based on past seasons – in other words, if you have a track record.
Of course it’s ideal if you’re able to budget for this sort of seasonal come-and-go without turning to outside lenders. But margins in small business manufacturing can be rather small. And sometimes even a successful business simply doesn’t run the sort of excess profits which allow them to juggle this entirely in-house. Seasonal loans can help balance out the year (like you may already do on your home heating or air conditioning bill) so that you can keep things running smoothly, whatever the time of year.
The only thing more exciting and terrifying that deciding to expand your business is deciding to start it in the first place! Perhaps things have been going pretty well. You’re growing and more and more often having to scramble to keep up with demand. There’s this great location on the other side of town. It would give you access to an entirely new range of customers. And allow you to specialize some of your production. Tempting, right?
Or, you learn that a competitor is struggling and perhaps looking for a way out. And you wouldn’t mind taking over their facilities and possibly even keeping some of their employees. Nothing wrong with a little competition. But it’s always nice when you’re doing such a better job of things that you’re able to absorb that competition and grow substantially.
Growth takes money. It’s a huge risk that carries the potential for huge reward. Much like a start-up loan, you’ll want to prepare a relatively detailed business plan, profit statements, and all the other relevant goodies before talking to lenders about this one. Still, if you’ve shown yourself to be a reliable business client for a few years already, you’re going in with a strong track record and you’re already established as a legit player. Don’t be afraid to negotiate or shop around a bit. That’s what your customers do, isn’t it?
Who Makes The Decision?
It’s never an easy call, deciding whether to take advantage of the many types of manufacturing loans out there. What that process looks like may depend largely on how you’ve chosen to structure your business. In other words, it may not be entirely up to you. What are some of the most common structures which might influence the decision-making process?
This is the most common structure for a beginning business, and one of the easiest to establish. Often, when we think of sole proprietors, we think of entrepreneurs who essentially work “freelance.” If you consult, train, entertain, write, proofread, or otherwise do work for which you expect to be paid, but are not actually employed by that person or company, you’re a sole proprietor.
The advantages are obvious. You make all of your own decisions. All profits are yours to do with as you see fit. You work the hours you choose and take the gigs you want while turning down any you don’t. If you thrive on independence and have plenty of personal drive, this may be the perfect set-up for you.
On the other hand, sole proprietors are responsible for paying their own employment taxes, which can be substantial. The money your employer would normally deduct from your check before you ever see it isn’t deducted from payments to sole proprietors. And without careful planning you can end up owing more than you can easily pay come tax time. There are no benefits, no health insurance, no provisions for sick days or unexpected life events which prevent the fulfillment of whatever agreement has been made. There’s also no guarantee of work. If there are no gigs, there are no gigs.
If you’re considering manufacturing loans, or any other sort of personal or business loans, and you’re a sole proprietor, the decision is entirely in your hands – as is the responsibility for how things turn out.
There are different ways to structure a partnership, and no specific number of partners required. A partnership can be two equal partners. Or one partner who has primary decision-making power. But also takes on most of the liability should things go south, or any number of combinations. Clear, detailed partnership agreements are important when structuring your business in this way. Even if the people involved are family or friends.
Actually, maybe especially if the people involved are family or friends.
Who makes the final decision on manufacturing loans or any other fiscal options depends on how the partnership is set up. But there’s certainly some advantage to having other vested parties at the table to discuss and consider the possibilities. The strongest business relationships tend to be those in which all parties are equally committed and share a common vision, but aren’t afraid to question or debate important decisions along the way.
Iron sharpens iron and all that, as they say.
LLC – The Limited Liability Company
This is a structure which combines the benefits of incorporation with some of the tax advantages of being a sole proprietorship or partnership. The individuals running the company are protected from personal liability in the case of bankruptcy, lawsuits, or other unforeseen disasters. You’re not going to lose your home or car if the business fails, in other words. In terms of manufacturing loans or other major money decisions, this provides some protection for ownership. But it doesn’t absolve you of the personal responsibility to do everything possible to repay your debts in a timely and complete manner.
Corporations (sometimes called “C-Corps”) are, legally speaking, entirely separate from their owners. They profit as legal entities, pay taxes as legal entities, may sue or be sued as legal entities. That means that the major advantage of a corporation is the separation between the individuals running the company and the concept of the company itself. Corporations tend to be larger businesses consisting of specialized departments.
Exactly who’s responsible for taking out manufacturing loans or other major financial decisions depends on the structure of the corporation. In some organizations, an individual has a task to make that call. In others, there’s a board or committee which would discuss the pros and cons before moving ahead.
Generally, if we’re talking about small business manufacturing, though, we’re not talking about these sorts of structures. Still, it’s good to be aware of them before venturing into even the earliest stages of starting your own business.
— Loanry.com | Loan Shop ? (@LoanryStore) 18. јул 2019.
Where To Look For Manufacturing Loans
As mentioned before, don’t limit your options when considering manufacturing loans or other sorts of financing for your small business. Meet with local banks and credit unions. Fill out paperwork with your local Small Business Association (SBA). If Uncle Arthur is serious about loaning you the money himself in exchange for a percentage of the business, why not grab a beer and have that conversation as well?
But before you commit, keep in mind that this is the 21st century and financing has evolved dramatically. The internet is a weird, wonderful place. And whatever else it’s done, it’s allowed for an explosion of nimble, creative financial organizations to tailor their offers and benefits to circumstances just like yours.
You don’t want to go in cold and randomly hope for the best, of course. That’s where we come in. We do quite a few things here at Loanry and our associated sites. But one of the most foundational is our ability to connect you with legitimate lenders likely to make competitive offers for your business. We don’t charge you anything and don’t want to sell you anything. We don’t even have a page for water bottles or t-shirts or whatever.
Our success model comes from helping you organize and improve the efficiency of your finances, your investments, your borrowing, your savings, and the like. We’ll take some basic information about who you are and what you’re looking for, then hook you up with a lender or lenders we think are most likely to meet your needs. After that, it’s up to you. If you like what they’re offering, you are at that point doing business with them. If you don’t, well… we’ll help you keep exploring. Or considering. Or educating yourself on the options.
It’s a little idealistic, to be sure – but it works and we can all sleep at night knowing that it does.
Keep in mind that with any loan, your name and your credit are on the line. They dramatically influence what sort of rates and terms you can get. And they are in turn shaped by how reliably you pay back your obligations.
A bussines owner can use manufacturing loans for many productive purposes, as we’ve already discussed. What you should NOT use them for i delaying the inevitable, or denying the obvious. Don’t go into debt trying to throw good money after bad. Or trying to avoid confronting major financial problems in your business or personal accounts. There are solutions for hard times. Denial isn’t one of them.
That said, all entrepreneurship involves risk, and dreaming, and a certain amount of charging madly into the future. When you’re ready, we’ve got your back.
Blaine Koehn is a former small business manager, long-time educator, and seasoned consultant. He’s worked in both the public and private sectors while riding the ups-and-downs of self-employment and independent contracting for nearly two decades. His self-published resources have been utilized by thousands of educators as he’s shared his experiences and ideas in workshops across the Midwest. Blaine writes about money management and decision-making for those new to the world of finance or anyone simply sorting through their fiscal options in complicated times.