Manufacturing businesses often pay for raw materials months before receiving payment for finished products. This creates persistent financial pressure that needs to be addressed. Negotiating net payment terms with suppliers can help, but a business line of credit is a more flexible solution that allows you to bridge production costs, fund prototypes or seasonal ramp-ups, and respond to equipment of compliance needs without derailing your operations.
Key takeaways
- Manufacturers can use a business line of credit to boost cash flow, keep production running smoothly, and stay competitive during seasonal fluctuations.
- To maximize your line of credit, negotiate rates with lenders, track credit and spending KPIs, and maintain healthy cash flow outside your credit line.
- You could combine a business line of credit with equipment financing, invoice factoring, or SBA loans to increase cash flexibility and reduce risk.
1. Fund prototypes, equipment upgrades, and other projects
Developing a prototype is the first step toward launching a successful product line. Unfortunately, this crucial part of the process is all speculative and investigative cost, with no guarantee of revenue. Getting a business line of credit can help by providing a cash flow cushion during low-revenue spending periods.
Access to a business line of credit also gives you the flexibility to repair, replace, or upgrade equipment before it breaks down, so you can keep your business competitive without having to cut necessary costs.
2. Purchase materials in bulk or pay early to secure supplier discounts
Suppliers have their own cash flow issues. Supply chain disruptions and import tariffs can reduce their pricing flexibility, but that doesn’t mean you can’t negotiate a better deal. In fact, most suppliers are willing to offer a discount if you increase your order quantity. You could save even more by paying your invoice early.
By paying less for raw materials, your sales margin will be higher as long as demand for your product remains the same or grows. If you suspect there is a ceiling on demand for your product, you can purchase just enough raw materials for your committed purchase orders. Also avoid over-ordering materials that will become obsolete.
Did you know?
The right inventory management strategy could help you optimize your cash flow, especially as customer demand fluctuates throughout the year. Learn effective ways to forecast demand and manage your inventory, plus tips for how to make the most of your supplier relationships.
3. Improve cash flow flexibility when negotiating payment terms
You can use a business line of credit to strengthen your position when negotiating payment terms with suppliers. Since you can draw what you need to bridge timing gaps or receive early-payment discounts, you can request longer net terms while keeping your credit usage ratio low and without risking late fees. Negotiating longer terms and lower borrowing costs will strengthen your business credit profile.
4. Get ahead on seasonal ramp-ups
Seasonal ramp-ups are particularly hard to manage without a cash flow cushion. Production forecasts rely on some hard-to-predict variables, including raw materials cost, manufacturing time, and projected demand. Incorrect estimates in any of these areas can put a dent in seasonal profits, but a business line of credit can help eliminate the risk of falling behind before you start earning revenue.
5. Keep certifications and compliance up to date
Industry certifications, safety standards, and regulatory compliance are all part of doing business. Keeping compliant is non-negotiable, but licenses and certifications usually come at a cost. Missing these deadlines can incur heavy fines, reputational damage, or production shutdowns. If you’re experiencing a cash flow gap, a business line of credit or business credit card could be a cost-effective way to cushion the blow to your revenue.
Line of credit vs. credit card
Explore the differences between a business line of credit and business credit card to see which fits your short-term and long-term financial needs.
Which is better for manufacturing businesses: a line of credit or a term loan?
You could also be weighing a business line of credit vs. a term loan.
The revolving capital of a business line of credit suits manufacturing cycles more than term loans, as manufacturers tend to have large cash flow dips between material purchasing and sales. With a business line of credit, you can draw the funds you need when you need them, and you’ll only have to repay what you’ve borrowed, plus a variable interest rate. This means your ability to pay for operations isn’t directly tied to your revenue, making a business credit line a more flexible option than a term loan.
Term loans, on the other hand, require more foresight, and you’ll be responsible for paying fixed interest on the whole sum.
Best practices for using a manufacturing business line of credit
Getting approved for a business line of credit is the first step. Follow these suggestions to help you manage it once you’ve been approved:
- Negotiate rates: Interest on a business line of credit is tax-deductible, but you still need to pay it when you repay draws. Negotiating a lower interest rate can help you manage cash flow, though negotiation may not always be an option.
- Track key credit usage KPIs: When possible, keep your credit utilization ratio below 30%, and keep your overall debt-to-income ratio low to avoid negatively impacting your business credit profile.
- Maintain healthy cash flow outside your credit line: A business line of credit is a debt liability, not a cash asset—don’t draw funds if you can’t repay them, and never use another loan or credit line to pay off your line of credit.
Alternative funding for your business line of credit
A business line of credit is not a cure-all for cash flow issues. Well-managed companies diversify their sources of capital using some of these alternative funding sources to complement their line of credit:
- Equipment financing: Lenders or suppliers that do equipment financing can structure an equipment purchase as a secured loan, with the equipment as collateral.
- Invoice factoring: You can sell your invoices to a factoring company for immediate cash, but the factoring company will receive your invoice revenue.
- Purchase-order financing: If you receive a large purchase order, you can contact a purchase-order financing company to pay your suppliers for the necessary materials. Once you fulfill the order, you must repay the financing company.
- Supply chain financing: To optimize cash flow across your supply chain, work with lenders who pay your suppliers directly while extending your payment terms.
- SBA loan: Small Business Administration loans can offer favorable terms and lower interest rates for qualifying manufacturers.
- Business credit card: Supplement your line of credit with a business credit card for smaller purchases, and consider issuing additional employee cards with spending limits to streamline procurement.
Apply for a business line of credit and term loans with one simple application.
Manufacturing loan and line of credit FAQs
Can I use inventory as collateral for a business loan?
Yes, some lenders will allow you to use inventory as collateral, but they’ll determine its collateral value using a discounting formula, not what you paid for it or claimed it as on your taxes.
Can I use a line of credit to buy equipment?
Yes, you can use a line of credit for equipment purchases, though it can be more cost-effective to use dedicated equipment financing for major equipment purchases. A line of credit is appropriate for smaller equipment purchases that you can pay for within one year, making the purchase a short-term liability.
How fast can manufacturers get approved for a business line of credit?
Getting approved for a business line of credit depends upon several factors, including but not limited to:
- Your time in business
- Business credit history
- The financial health of your company
Manufacturing businesses with strong business credit and two or more years in business are more likely to get approved.
