MONEY IS EVERYTHING
TIPS FOR SECURING SUPPLY-CHAIN FINANCING IN A TOUGH LENDING ENVIRONMENT
When Stella & Chewy’s, a manufacturer of all-natural dog food, wanted to finance new equipment such as freeze dryers for a new facility in Milwaukee in 2011, CFO Greg VerPlank tried a strategy that many companies abandoned after the global financial crisis. He turned to the company’s banker.
Paul Sackman, an assistant vice president of Commercial Banking at Park Bank, a local institution focused on serving southeastern Wisconsin, worked with Stella & Chewy’s to secure the loan for the equipment and refinanced its existing debt, says VerPlank. While VerPlank declined to share the exact amount of the loans, he says, “The bank has been very amenable to all of our financing needs.”
Hunting down financing for the various elements in a manufacturing company’s supply chain has never been simple. That’s been especially true since the recession, given the slow thawing in lending by banks, which are generally seen as the most cost-efficient source of outside capital. “It’s been a somewhat difficult time for companies to find financing,” says Carol Lapidus, partner and national leader for Consumer Products Industry at McGladrey, a provider of assurance, tax and consulting services.
Like Stella & Chewy’s, some manufacturers have succeeded in securing a line of credit from their banks while others have gotten creative by negotiating favorable terms with suppliers and customers or turning to short-term, alternative financing or private-equity investors. The 2013 Capital Markets Report by the Pepperdine Private Capital Markets Project found that among deals closed in the 12 months prior to September 2012, 20 percent of asset-based lenders had worked with firms involved in manufacturing, making this the best-served among all industries. Among private-equity investors, 19 percent said they were involved in deals with manufacturing firms. The trend is likely to continue. Among private-equity professionals, 19 percent said they planned to make investments in manufacturing companies in the 12 months after the survey.
While there are plenty of supply-chain financing options for manufacturers, it can be hard to navigate them. Here are some tips on how to find the money you need.
Reducing the funding you need to the bare minimum will not necessarily give you an edge in winning a bank loan, because very small deals that aren’t very profitable may not be so attractive to lenders. A May 2013 survey by the Federal Reserve Bank of New York found that while 73 percent of small firms in New York, New Jersey and Connecticut that sought loans of $100,000 or more were successful in obtaining them, only 57 percent of those seeking less than $100,000 got the money they wanted.
However, making operations more efficient and preventing wasted supplies can reduce your need for financing. Rick Pay, a Portland, Oregon-based consultant specializing in operations and the supply chain, says that many companies he sees have to replenish their stock about four times a year. “If they could take that to six, they could free up a significant amount of cash,” he says, because buying less more often would reduce inventory by one-third, thus keeping more cash on hand and diminishing the need for financing.
NEGOTIATE BETTER DEALS
Some small manufacturers are improving cash flow by asking clients for payments up front, progress payments in which they get paid in installments before a job is completed, or help in financing raw materials, says Jill Lippert, a quality engineer at Exact. The Netherlands-based firm with offices in the U.S. offers manufacturers solutions in areas such as production and logistics, including software to help them determine the precise amount of inventory to keep on hand. “They are getting really creative,” says Lippert of the contract manufacturers she often works with. “I see this trend continuing.”
When bank financing slowed during the recession, many manufacturers were also forced to negotiate better terms with their suppliers, according to Jeff Stibel, CEO of D&B Credibility, which handles credit scoring for businesses. For instance, a manufacturer might ask to pay suppliers in 90 days rather than 30. Stibel sees this approach continuing and potentially reducing the role of banks. “A lot of these companies have found this alternative to be much more cost effective,” he says.
Paying on consignment is also becoming more common. Firms that make machines might negotiate a deal to pay a component supplier once it actually sells its machines, for example. “It’s a virtuous circle,” says Stibel. “If you’re a supplier of machine parts, your goal is to sell those parts. If a purchaser who’s making a widget can’t afford to buy them, you’re inclined, as long as it is a reputable firm, to say, ‘Just take my parts on consignment.’ At least they’re getting payment and expanding their business.”
Stibel says that by forcing firms to work more closely with their trade partners, the reduction in bank financing could ultimately make some manufacturers more competitive. “It could eliminate a middleman that was increasing the costs of fulfillment,” he says.
LOOK FOR A FRIENDLY BANK
If you do need to seek outside financing, it’s hard to beat a bank loan on interest rates. The maximum rate in the U.S. Small Business Administration’s popular 7(a) loan program, often used to finance operations, is the base rate (currently 3.25 percent) plus 2.25 percent, if the money is due in less than 7 years. The average 7(a) loan size was $337,730 for the 2012 fiscal year.
While lending may not be back to pre-recession levels, some banks are actively trying to recruit manufacturers as customers. In July, HSBC Bank USA announced a $1 billion, 18-month dedicated loan program for small and midsize U.S. firms looking to export or find growth opportunities abroad. The financing can be used to cover supply-chain costs, according to a spokesperson. Some banks also offer asset-based financing, although it is generally easier to secure for domestically made products than for those being manufactured overseas, says McGladrey’s Lapidus.
As Stella & Chewy’s found, small, local institutions may also welcome business from firms in their area, so stopping into your neighborhood branch may pay off. “What I’m seeing is the smaller community-sized or regional-sized banks seem to be a little more aggressive in dealing with small- and middle-market companies,” says consultant Pay. “They tend to be offering a little better terms.” VerPlank, Stella & Chewy’s CFO, has stayed in close touch with his banker. “I have daily conversations and golf with him,” he says.
TRY ALTERNATIVE FINANCING
Methods like factoring and purchase-order financing can be very costly compared to bank financing, but for manufacturers with a troubled credit history or poor cash flow, they can be a good short-term solution, say experts. “That’s where you go as a last resort,” says CPA Richard Levychin, a partner at accounting firm KBL LLP in New York City. In factoring, a manufacturer will generally sell its receivables to a financing company for a discounted price. With purchase-order financing, a business with a purchase order from a customer can receive financing to pay its suppliers. The average annualized rate for factors often ranges from 24 to 30 percent, says Levychin. For purchase-order financing, rates may be even higher.
Lapidus has seen an uptick in use of purchase-order financing among U.S. firms that contract with factories overseas. “It used to be that more companies that were manufacturing overseas had a relationship and were getting terms,” she says. “They didn’t have to pay the factory for 30 to 90 days after the goods were produced.” However, economic problems in other parts of the world have put pressure on plant owners there, she notes.
Companies can reduce the costs associated with manufacturing in Asia by minimizing the need to fly goods to the U.S. from other countries and instead ship by boat, which is slower and cheaper, Lapidus notes. She adds that some advance scheduling is required to be sure goods make it to retailers and others sales outlets on time.
CONSIDER A PRIVATE EQUITY INVESTOR
In the past, many manufacturing-firm owners looked to private-equity firms to buy them out when they were looking to retire. However, experts say that more owners are now willing to sell a stake to outside investors in exchange for growth capital—and finding them very responsive. “There are a lot of funds starting to show up, looking for deal flow,” says Levychin. The trend, he says, has heated up among firms involved in overseas manufacturing.
Lippert, based in western Pennsylvania, says sometimes taking on private-equity capital is a matter of survival. “So many of these small firms go under,” she says. For some, bringing on a partner can bring a turnaround.
To find the right private equity firm, it helps to have an intermediary. Often, boutique investment banks will introduce clients seeking financing to private-equity firms that know their industry, says Lapidus. “We’re seeing there is a lot of capital out there and private-equity firms are really looking to invest in companies that have great growth potential,” she says. “These private-equity firms are thrilled to come in on a majority or minority basis and invest if they see growth potential.” And the management expertise they bring can often go beyond funding the supply chain and help bring about new opportunities owners may not have considered.
Dogged Due Diligence
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