Manufacturing Loans:
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In the manufacturing industry, factory owners require significant upfront capital to get started with manufacturing operations. From purchasing inventory and raw materials to hiring labor and ensuring quality control, every stage of running a manufacturing unit requires funds. With the help of manufacturing loans, factory owners may be able to get quick access to funds to setup their manufacturing units and overcome roadblocks like labor shortages, inflation, and high operating costs.
Also, thought leaders predict manufacturing companies to continue to invest in smart AI-powered manufacturing technology. The cost of advancing technology can no longer be covered with monthly revenue alone. Thus, to stay competitive and follow the best industry practices, manufacturing companies may benefit a lot from manufacturing loans.
What are Manufacturing Loans?
A manufacturing unit may come across several challenges like supply chain disruptions, skilled labor shortages, regulatory compliance, threat from automation, equipment breakdowns, increasing raw material costs, and more. Manufacturing loans help business owners overcome all such problems with the help of suitable funds secured at competitive interest rates.
With the help of manufacturing loans, business owners can arrange for working capital, increase productivity and revenue, while ensuring sustainable growth through manageable monthly payments. As various manufacturing loan options are available for owners, they can expect to secure a high loan amount with convenient repayment terms. They can compare quotes from multiple lenders, compare interest rates, APRs, loan tenures and more.
Certain manufacturing loans may come with the option to negotiate loan terms. Likewise, in cases where a business owner fails to secure funds from private lenders and traditional banks, they can opt for federal government manufacturing loan programs as well.
Which Types of Manufacturing Businesses Can Use Manufacturing Loans?
There are no particular specifications or criteria in this regard from lenders. Nearly all types of manufacturing businesses may benefit from manufacturing loans.
Explore the Different Types of Loans Used by Manufacturing Businesses
SBA Loan Programs
The U.S. Small Business Administration offers several financing options for manufacturing companies. While the SBA itself does not offer any loans, it helps manufacturing business owners connect with non-profit community development lenders, who offer loan amounts at comparatively lower interest rates for qualified applicants than traditional banks. It is important to note that the SBA doesn't have a specific ‘manufacturing loan' product, but manufacturing businesses can use it.
Along with helping secure funds for your manufacturing business, the SBA also guarantees the loan. Two popular SBA loan programs are:
- SBA 504 loans: These are short-term microloans with the max loan amount of $50,000. Business owners can avail these loans without submitting any collateral. The repayment terms of SBA 504 loans are simpler.
- SBA 7(a) loans: These are long-term financing options with the max loan amount of up to $5 million. However, as per the recently passed Made in America Manufacturing Act, SBA has doubled the loan amount for qualifying manufacturers to $10 million. Business owners can set up entire facilities, warehouses, and fleets of transportation vehicles with these loans. The loan tenure in SBA 7(a) loans is longer, and evaluation criteria is strict.
Term Loans
Term loans are traditional lump-sum loans that come with a fixed or floating interest rate and a fixed tenure. These loans are multi-purpose loans with no limitations on the usage. Manufacturing business owners can use these loans for small to large expenses. However, qualifying for term loans may be challenging for new businesses because of limited credit history. Lenders may also require evaluating all your financial documents, credit score, and business plans thoroughly before making a decision.
Fortunately, term loans often have a scope of negotiation. Business owners can negotiate terms like loan tenure, loan amount, type of collateral, value of collateral, and other repayment terms.
Business Line of Credit
These are revolving line of credit that provide continuous access to funds through a pre-determined credit limit. Once a credit limit is assigned, owners can withdraw any amount required to fulfill their various business needs. They only need to pay interest on that amount. Once business owners start repaying the loan, they keep freeing up the credit limit and can borrow again up to that limit.
Business line of credit provides manufacturing business owners the liquidity and flexibility to overcome unforeseen economic challenges. These also don't require any down payments or collateral, keeping business assets and cash flow protected.
Commercial Real Estate Loans
Purchasing a real estate is a major investment, and manufacturing businesses cannot run without one. For businesses planning purchase a facility or warehouse, commercial real estate loans can be quite helpful. They spread the monthly investments over a long repayment tenure, with even 15-years, 20-years, and 30-years loan tenure options available in the market. These manufacturing loans are secured by the real estate property itself, which improves your chances of securing lower interest rates.. These manufacturing loans are secured by the real estate property itself, which improves your chances of securing lower interest rates.
Equipment Loans
As discussed above, manufacturing businesses require a wide range of equipment. Sourcing those can put a huge strain on your budget, especially when you're bootstrapping the entire startup. Instead, taking an equipment loan can be helpful. In these fixed-asset loans, the equipment serves as the collateral and helps increase the production capability of the business. In a way, the equipment itself helps pay back for its loan. Qualifying businesses with good credit score and financial statements can secure equipment loans at appealing interest rates. With both fixed-rate and floating-rate options available, business owners get the choice to select an option that best matches their business goals.
Commercial Vehicle Loans
Transportation often serves as the backbone of your logistics network. Based on the type of goods a manufacturing business is producing, it can require anywhere from a few pickup trucks to full-size trailers. Financing those through commercial vehicle loans can be a smart option. Not only do these loans have convenient repayment terms but may also help you do tax savings by being counted as a deductible in tax returns.
Invoice Financing
For short-term manufacturing loans, invoice financing is a lucrative option. In invoice financing, business owners secure a loan against their pending invoices. Instead of waiting for weeks for payment to arrive, manufacturing businesses can opt for invoice financing and arrange working capital to produce their next batch of goods. The repayment tenure in invoice financing is usually shorter, making repayment easier.
How to Use Manufacturing Loans?
01 Set up a New Manufacturing Unit
Setting up a manufacturing unit requires investments, ranging from commercial property to equipment like pumps, mixers, grinders, assembly line, fire extinguishers, helmets, and more. Manufacturing loans can cover all such costs required to set up a manufacturing unit.
02 Purchase Warehouses
Along with setting up a new unit, business owners can use manufacturing loans to set up warehouses, distribution centers, and other storage facilities.
03 Purchase Equipment
Manufacturing facilities are often equipment heavy. From forklifts, side loaders, and production line conveyer belts to containers, cutters, grinders, and more, the costs of all equipment are surging. With the help of manufacturing loans, business owners can easily manage these expenses.
04 Purchase Advanced Technology
AI-led automation and IoT devices are gaining speed in several industries. These technologies automate several processes, increase productivity, reduce manual errors, and even help with predictive maintenance. With readily funds in hand through manufacturing loans, business owners can procure latest technology and compete with full strength.
05 Hire Staff
Skilled labor shortages are one of the main challenges that manufacturing facilities face. Manufacturing loans provide the funds required to attract skilled talent and set up a reliable team.
06 Training
Many times, manufacturing units need to train staff to make them productive. Small manufacturing business loans cover such training costs. They can help you arrange training material or even hire training personnel.
07 Purchase Raw Material
Any manufacturing facility needs raw materials and goods to start production. With inflation, the cost of sourcing raw material is increasing. Manufacturing loans can be used to cover all such costs.
08 Purchase Commercial Vehicles
To strengthen their transportation network, loans for manufacturing units can be used for purchasing commercial vehicles like trucks, cars, bikes, trailers and loaders.
Eligibility Criteria for Manufacturing Loans
There are no fixed criteria for manufacturing loans. Each lender sets up their own requirements for approval and decision making. For reference, lenders usually overview the following things:
Credit Score
The higher the credit score, the higher your chances of securing any of the manufacturing loan options.
Financial Statements
Documents like tax returns and balance sheets help prove your income stability and creditworthiness to lenders.
Debt-to-Income Ratio
Existing unpaid debts may impact your chances of securing financing for manufacturing purposes. Consider refinancing previous debts under a single loan, or close them off.
Downpayment
For a loan for manufacturing unit or any other fixed-asset loan, lenders may ask you to make a down payment. Higher down payment also decreases your monthly payment.
Co-Signer and Guarantor
By having a co-signer or guarantor, borrowers decrease the overall risk for lenders. These may improve your chances of securing a loan.
Summing Up
United States is the world's second largest manufacturer with manufacturing units spread across the nation and in various industry. Considering the profitability of the sector, many business owners are showing their interest in launching manufacturing businesses. With quick access to funds, they can timely set up their manufacturing facilities and enter the market. From sourcing raw materials to hiring manpower, manufacturing loans can be used for various purposes. Qualifying applicants may majorly benefit from competitive interest rates, faster decisions, and lower down payment requirements. However, it is also important to consult a loan professional to understand the loan terms and interest rates applicable to you.
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FAQs about Manufacturing Loans
1. Are there any SBA manufacturing loans?
The SBA offers loans to all sorts of small businesses, including manufacturing, retail, Direct-to-Customer and more. Interested business owners can apply for SBA loans, but their decision making maybe longer.
2. What credit score I need to secure finance for manufacturing?
There's no fixed figure. However, lenders generally prefer a credit score above 630.
Note: Credit score is not the only deciding factor for lenders. To know your eligibility for a loan product, consult a professional loan advisor.
3. What are manufacturing equipment loans?
Manufacturing equipment loans are fixed-asset loans that help business owners source essential manufacturing equipment at smaller monthly payments. In these loans, the equipment itself secures the loan. However, lenders still may require business owners to make a down payment. Consult a loan advisor to know more.
4. Can I take a loan to set up a new manufacturing unit?
There exist several loan programs that business owners can use to set up a manufacturing unit. These include term loans, SBA loans, business line of credit, and more.
5. How much funding do I need to set up a manufacturing unit?
The loan amount varies on multiple factors like they type of goods you want to produce, geographical region, licensing and permits, and even the costs of machinery and raw material. Prepare a proper business plan to figure out the amount you require to set up a manufacturing unit.
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