Wednesday 1st May 2019
Manufacturing is a particularly tough industry to operate in. Readily exposed to economic conditions and the fluctuations in material prices, it can be a major challenge to maintain good cash flow, even when the long-term outlook is positive, and business operations are successful. This is why a significant number of manufacturers do rely heavily on having good funding products in place, whether continually or at key moments in business progression. They help to mitigate some of the difficulties that the market presents, often by helping to even out cash flow. Of course, that’s not the only reason; many manufacturing businesses are moving from strength to strength and require a cash injection to help them move to the next level.
Let’s take a look at some of the things you need to think about to ensure you’re choosing the right product for your funding requirements.
Considering your business needs
The initial stages of any investigation into your funding options should always begin with a thorough appraisal of your current situation, and what it is that you need. Too many businesses will pursue finance without already having a clear idea of what it is that they need from their finance product, and manufacturing businesses are no different.
Naturally, raw materials are one of the largest costs a manufacturing business faces, and finance might be needed to secure large volumes at good prices, or it might be needed to help even out cash flow as prices fluctuate. Consider exactly what you might need in order to combat material prices.
Machinery and equipment are also big financial considerations for manufacturing businesses, and they carry with them different funding needs. Depreciation of assets can be costly, which means that serious thought needs to go into how you want to take the hit of depreciation. Would a loan be suitable if the product has long-term value, or would specific unit leasing be more appropriate?
If it’s funding for general expansion - perhaps investment into people or premises - then a business case needs to be prepared. Rather than going out into the market, seeing what’s available, and deciding what you can do with that, it’s better to investigate what you need, and the returns it will generate, and then find out how the market can work for you.
Identifying the most appropriate product
Once you’ve understood exactly what you need the funding for, and what the business case is, then you’ll need to find the funding product that suits you.
The key here is to make sure that you’re taking the broadest view of the market possible, so never stick with one avenue from the outset. Use everything from comparison sites to brokers to ensure you have a full understanding of all of the different products available and how they might be able to help meet your requirements.
If you need flexibility when it comes to purchasing in order to take advantage of good prices, or you need a backup in case of late payments, then overdraft facilities may be useful. Alternatively, if you’re funding an expansion, then a straight loan might be the most effective solution, provided the return from your investments outweighs the repayments.
There are alternative products too. Invoice finance is a popular solution for manufacturing businesses that takes some of the strain out of late or non-payment of invoices. In short, when you raise your invoice, the finance provider immediately pays you most of the value of it, rather than you having to wait until the customer pays.
Choosing a finance provider
The market landscape is now incredibly varied, with a wide selection of finance providers prepared to give you the funds you’re looking for.
At one end of the scale are the big traditional banks. The staple of their offering - standard business loans are some of the most common choices for enterprises looking for a cash injection, but that doesn’t mean this is all on offer. Banks have diversified in recent decades and years, and they often have a fairly large choice of products, along with a reputation for generally reliable - if unspectacular - customer service. They’re always worth considering as a first point of call.
However, businesses looking for more specialist products may wish to take a deeper look into providers that specialise in more tailored solutions that are designed to fit your requirements. It’s more work finding these, and work should be done to evaluate their customer service, but they’re often an excellent option. Brokers are widely available, and aim to help find you the best combination of product and provider.
There are other options too, including websites that connect you to individuals and small investment groups looking to give funding to businesses, or even crowdfunding. This is a different way of doing things, but one that’s increasingly viable, and certainly one worth considering.
To conclude - the market is vast, and there’s a lot to choose from. In order to ensure you’re making a sound business decision, you need to determine exactly what you’re looking to achieve, find out which product will serve this best, and then find the provider that’ll give you the best terms and service. It may be astute to consult an independent financial adviser when making these decisions.
Head to our Invoice Finance page to find out how we can help your business and for further cashflow advice!