Startup Financing for Manufacturing
There are a number of sources for starting or growing your business
Most entrepreneurs need to go beyond their own pocketbooks to start up their businesses or expand their operations. Many opt to tap into their personal networks, borrowing from friends and family. But in a capital-hungry segment such as manufacturing, these sources may not provide enough money to cover your needs. That is when it’s time for you to explore alternative sources of funding. Here are some of the financing options available.Debt financing
Debt financing involves borrowing money from an outside source — such as a bank — with the promise to pay back the money borrowed within a set term, along with interest. Borrowers usually provide collateral, but in the case of manufacturers, banks may opt to use the equipment you lease or buy along with any raw materials and inventory as security.
In the event that you don’t have sufficient assets to secure a loan, consider the U.S. Small Business Administration (SBA) guaranteed lending program. The SBA’s program — also known as the 7(a) loan program — encourages lenders to make long-term loans to small businesses by providing a guaranty. It promises that the U.S. government will reimburse the lender for its loss if the borrower defaults.
The basic 7(a) loan guaranty can be used to provide working capital or to finance the purchase of machinery, equipment, furniture and fixtures or land and buildings. For expanding or modernizing, there is the certified development company loan. You can use this long-term, fixed-rate loan to acquire machinery, equipment or real estate.
Equity financing
Equity financing involves giving an external investor or business partner part ownership in exchange for cash. The main difference from debt financing is that you relinquish some control of your company in exchange for the funding. Keep in mind that your investors may want dividends or a portion of profits in exchange.
The most common source of equity financing for small businesses comes from friends and family, but another source includes venture capitalists. That said, venture capital may not be an option if you’re in the manufacturing sector — venture capitalists tend to prefer early-stage, high-growth companies in the biotech or technology sectors.
Equipment leasing
Buying or upgrading equipment can be a substantial expense for manufacturing businesses. If you don’t have a pile of cash sitting around, consider equipment leasing.
Leasing equipment has several advantages. For one thing, it allows you to get up-to-date technology without eating up precious capital. That will keep you financially solvent and competitive. But equipment leasing may not be for everyone. You’ll have to decide based on several factors, including the type and use of equipment and your long-term capital and credit demands.
You can learn more about equipment leasing through the Equipment Leasing and Finance Association.
Peer-to-peer financing
Another form of financing is peer-to-peer financing. Essentially another form of debt financing, peer-to-peer financing mimics the traditional lender and borrower structure, except you have individual lenders — or groups of them — instead of banks and financial institutions. By cutting out the middleman, borrowers can get money at lower interest rates than what banks offer. Prosper and Zopa are two peer-to-peer lending services available in the U.S.
Peer-to-peer financing can be a useful alternative, but as with borrowing from friends and family, the amount of financing may not be enough for a capital-intensive manufacturing business.
Obtaining financing
Regardless of the type of financing you choose, one thing is certain: You must have a well-constructed business plan. In general, a good business plan for a bank loan should include the amount of money you need; how you plan to use your funds; how the loan will benefit your business; the requested repayment term; and a list of the collateral you’re offering as security.
As a manufacturer, your business plan should also include planned production levels; overhead costs (preferably compared to industry average); prices per product line; anticipated or actual gross profit margin; production limits of the planned physical plant and equipment; purchasing and inventory management procedures; and any new products that could provide additional revenue.
Once you’ve put together a well-researched plan, run through the SBA’s loan application checklist to make sure you have everything covered. Then make sure you have a certified public accountant or attorney look it over to make sure it’s airtight.
Ashir Badami is senior editor at Business.com, the web’s largest business-to-business searchable directory and home to more than 35,000 business how-to guides.
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