We live in interesting times. Political rhetoric at the macroeconomic level, trade disputes, and increasingly short-term contract demands create business challenges for manufacturers that require a more sophisticated approach to managing short term and long term capital needs. Building the right go-to-market model and the budget to achieve sustainable profitability first starts with a recognition of a few of the capital raising, allocation, and management, issues facing your company.
Diversification as a Measure to Combat Uncertainty
What is the real impact of rising commodity prices? How will trade negotiations affect your cost of raw materials, export opportunities and the broader economy? Will regulation limit business growth or affect the bank’s ability to finance that growth? The news over the last several years has not exactly bred optimism among businesses. And for good reason. Banks are under an unprecedented amount of pressure to meet capital adequacy and other balance sheet requirements—making it harder to deploy capital. Not to mention, how will economic uncertainty impact the banks’ lending policies? As capital slows, manufacturing industry growth plans often follow.
The fact is, there will always be uncertainty. Technology bubbles, real estate bubbles, macroeconomic sluggishness, regulation…there will always be an excuse to live with mediocrity. A simple diversification approach of letting real estate lenders do real estate, specialized equipment lenders handle equipment and the banks handling the working capital could create opportunity. By forcing too much of your lending into the bank, you may be limiting the growth potential of your company by unnecessarily over-utilizing precious bank capacity. Diversification can lead to greater access to more flexible capital when you need it most, so long as you’re able to retain an acceptable cost of capital.
Manufacturing Fads & Antiquated Technology.
Manufacturing executives rely on contract manufacturers to be increasingly nimble and adaptable to meet the fads of the industry. But with many manufacturers lagging behind the technology efficiencies of automation combined with the trend of very short term production contracts, companies are often anything but adaptable. With contract terms as short as 18 months and dated automation technologies, how can companies affordably equip for production without enormous capital outlay and significant end of contract risk? These capital risks and budget concerns often limit growth plans or the ability to bid on business competitively.
To solve this, manufacturers must identify lending alternatives that can tailor solutions to the specific asset or business need in order to limit end of contract risk and high uses of cash to equip for a new agreement. The flexible operating lease may offer companies the ability to obtain the equipment they need, preserve cash and leverage the unmatched flexibility to turn in the equipment should the contract end, or renew the agreement if the production contract renews. Other equipment financing structures can provide for a better cash flow alternative that makes it more affordable to retain equipment in between jobs. And wrapped with a simple monthly payment, budgeting becomes predictable, the ability to afford new technology increases and the business becomes the model of versatility the manufacturing industry requires.
Matching revenues and expenses.
With the short term, almost transient nature, of manufacturing agreements, financial managers often find it difficult to match cash outflows with inflows. It can take a minimum of 6 months to achieve the cash flow benefits of a production agreement between recovering the initial investment and pushing through the pains of the receivable cycle to achieve return. This gap can create a cash drain that doesn’t just impact a single contract, but the overall operations of the company.
The rental or lease payment allows for financial managers to more easily match income and expenses. With 100% or nearly 100% financing from a reputable equipment-driven finance partner, companies can limit the up front cash impact of a new agreement. Simple monthly payments allow for “ramping up” of expenses into a new contract affordably while allowing more time to generate the revenues to show profitability sooner. Equipment financing can be structured to “back-load” payments to further manage cash flows. And finally, the end of contract flexibility to turn in the equipment should the contract be vacated for any reason or simple renew if the contract continues beyond the original short term agreement. This solution offers the ability bring in new business affordably, but also with the ability to scale your food operation quickly to meet customer demands.
While uncertainty, fads and the cash requirements of manufacturing are subject to these “interesting times”, some out-of-the-box thinking might position your company to achieve uncommon growth. Attention to the capital raising issues facing your company may feel challenging, but in challenge there is opportunity. Now is the time to examine new possibilities and alternatives.
As a direct lender throughout the United States and abroad, the deal structuring experts at Nexseer Capital solve for the equipment and project finance needs of mid-sized and large companies. We leverage our decades of experience as dealmakers across a range of asset classes, financing structures, and economic cycles to solve problems and deliver execution confidence. In other words, we help you move from complexity to clarity.