Federal Financing Options for Manufacturing Companies
Where do you go when private funding sources and traditional commercial lenders have turned you down?
When seeking financing for your manufacturing business, a wide range of options are initially considered, including: self-funding, funding from family and friends, angel funding and bank financing. The question becomes more difficult when private funding sources and traditional commercial lenders have turned you down. For many manufacturing companies in this situation, the solution has been (and still is) the federal government through the U.S. Small Business Administration (SBA). Some SBA loans have less stringent requirements for owner’s equity and collateral than traditional bank loans. In addition, some SBA loans are for smaller sums than most banks are willing to lend. Thus, they are very appealing.
The SBA does not actually make direct loans. Instead it provides loan guarantees, promising to pay back a certain percentage of your loan if you are unable. Banks participate in the SBA program as regular, certified or preferred lenders. The SBA can help you prepare your loan package, which you then submit to banks. The more banks you approach, the greater the chance that more banks will be left in the bidding, which can lower your cost of borrowing.
The most basic eligibility requirement for an SBA loan is the borrower’s ability to repay the loan from cash flow. The SBA also looks at personal credit history, industry experience or other evidence of management ability, collateral and owner’s equity contributions. Among the terms of SBA loans, an individual with at least 20% in ownership equity must be willing to make a personal guaranty.
The SBA offers a wide variety of loan programs for businesses at various stages of development. Here’s a closer look at some of these programs:
7(a) Guaranty Loan Program
The primary, most flexible SBA loan program is the 7(a) Loan Program. The SBA provides maximum loan guarantees of up to $5 Million or 75% of the total loan amount, whichever is less. For loans that are less than $150,000, the maximum guarantee is 85% of the total loan amount. SBA policy prohibits lenders from charging many of the usual fees associated with commercial loans. Still, you can expect to pay a one-time guaranty fee, which the agency charges the lender and allows the lender to pass on to you.
A 7(a) Loan can be used for many business purposes, including: real estate, expansion, equipment, working capital and inventory. The money can be paid back over as long as 25 years for real estate and equipment, and 10 years for working capital. Interest rates vary with the type of loan.
The 7(a) program also offers several specialized loans. For example, the SBAExpress program, promises quick processing for amounts less than $350,000. SBAExpress can get you an answer quickly because approved SBAExpress lenders can use their own documentation and procedures, and then attach an SBA guarantee to an approved loan without having to wait for SBA approval. The SBA guarantees up to 50% of SBAExpress loans.
For businesses that need working capital on a short-term or cyclical basis, the SBA has a collection of revolving and non-revolving lines of credit called CAPLines. A revolving loan is similar to a credit card, in that you carry a balance that goes up or down, depending on the payments and amounts you borrow. With non-revolving lines of credit, you borrow a flat amount and pay it off over a set period of time.
CAPLine loans provide business owners short-term credit, with loans that are guaranteed up to
$2 Million. There are five loan and line-of-credit programs that operate under the CAPLines umbrella:
1. Seasonal line of credit: Designed to help businesses during peak seasons when they face increases in inventory, accounts receivable and labor costs.
2. Contract line of credit: Used to finance labor and material costs involved in carrying out contracts.
3. Standard asset-based line of credit: Helps businesses unable to meet credit qualifications associated with typical bank credit; provides financing for cyclical growth, recurring or short-term needs.
4. Small asset-based revolving line of credit: Provides smaller, asset-based lines of credit (up to $200,000), with requirements that are not as strict as the standard asset-based program.
5. Builder’s line of credit: Used to finance labor and materials costs for small general contractors and builders who are constructing or renovating commercial or residential buildings.
Each of these five credit lines has a maturity of up to five years but can be tailored to the borrower’s needs.
SBA financing isn’t limited to the 7(a) group of loans. The MicroLoan program helps business owners get very small loans, up to $25,000. The loans can be used for machinery and equipment, furniture and fixtures, inventory, supplies and working capital. They cannot be used to pay existing debts or to purchase real estate. This program is unique because it assists borrowers who generally do not meet traditional lenders’ credit standards.
MicroLoans are administered through nonprofit intermediaries. These organizations receive loans from the SBA and then turn around and make loans to entrepreneurs. Small businesses applying for MicroLoan financing may be required to complete some business-skills training before a loan application is considered.The maximum term for MicroLoans is six years and the interest rates vary.
CDC/504 Loan Program
On the opposite end of the loan-size spectrum is the 504 Loan, which provides long-term, fixed-rate loans for financing fixed assets, usually real estate and equipment. CDC/504 loans are most often used for growth and expansion.504 Loans are made through Certified Development Companies (CDCs) – nonprofit intermediaries that work with the SBA, banks and businesses looking for financing. There are CDCs throughout the country, each covering an assigned region.
If you are seeking funds up to $5 Million to buy or renovate a building or to purchase major equipment, consider bringing your business plan and financial statements to a CDC. Typical percentages for this type of package are 50% financed by the bank, 40% by the CDC, and 10% by the business.
In exchange for this below-market, fixed-rate financing, the SBA expects the small business to create or retain jobs or to meet certain public policy goals. Businesses that meet these public policy goals are those whose expansion will contribute to business district revitalization (such as establishment of an empowerment zone), a minority-owned business, an export or manufacturing company, or a company whose expansion will contribute to rural development.
AAFCPAs believes that all small businesses should be fully aware of the possible benefits of utilizing non-traditional sources of financing. The manufacturing industry continues to be a driving force in the U.S. economy, and to maintain a competitive edge, many manufacturers utilize and benefit from the capital resources of the U.S. Small Business Association.
AAF has been helping sophisticated, privately-held companies succeed since our founding in 1973. If you have any questions about financing the expansion of your company, please contact your AAFCPAs partner, or Jack Finning, CPA, CGMA, at 774.512.4105, email@example.com.