Business Loan for Manufacturers — Two Facilities, Not One

Why one facility does not work

A manufacturer has two distinct money problems and they behave differently.

Fixed assets — the machine, the shed, the electrical installation — are bought once and earn for years. They belong on a term loan matched to their working life, and preferably financed as equipment finance, where the asset itself secures the borrowing and brings the rate down.

The operating cycle — raw material, work in progress, wages, finished stock, receivables — consumes money continuously and returns it in waves. It belongs on a revolving limit.

Fund the second with a term loan and you pay interest all year on money you needed for six weeks. Fund the first with the overdraft and the limit stays permanently drawn, so the next genuine crunch arrives with nothing available. Both mistakes are common and both are expensive.

What underwriting looks at that other trades do not face

Capacity utilisation. A unit running at 40% of installed capacity is asked why. Sometimes the answer is good — a new line commissioned last quarter, a deliberate build for a contract. Sometimes it points at a demand problem. Either way, have the explanation ready, because an unexplained gap between capacity and output is read pessimistically.

Buyer quality and concentration. Once you supply on credit terms, your buyers' reliability is part of your risk. Supplying three large well-rated OEMs is a strength; supplying one is a concentration that will be probed.

Power and compliance. Electricity bills are a useful independent check on whether production matches claimed output, and they are often asked for. Pollution board consent, factory licence and other approvals are verified — an expired consent can hold up a file for weeks.

Work in progress. Half-finished goods are worth less to a lender than raw material or finished stock, and drawing power reflects that. A unit with a long conversion time has more value tied up in the least financeable form.

Shortening the cycle beats borrowing for it

Every day removed from the cycle is money you do not have to borrow. Three places to look before arranging a larger limit:

• Raw material holding. Buying three months of input because the price was good ties up money for three months. Sometimes worth it; often not.
• Conversion time. Work in progress is the least financeable asset you hold. Reducing it improves both cash and drawing power.
• Debtor days. Discounting invoices on your large buyers can convert a sixty-day wait into two days at a cost tied to their credit rather than yours.

Questions this page gets asked

Should I take one loan or two facilities?

Two, in almost every case. A term loan for plant and machinery matched to its working life, and a cash credit limit for the operating cycle. Combining them means paying term-loan pricing on short-term money, or exhausting the limit on a fixed asset.

How much of a machine will a lender fund?

Typically 70% to 85% of the invoice, with the balance as your margin. Used or imported machinery attracts a lower percentage. Full detail on the machinery loan page.

Why is capacity utilisation asked about?

Because it is a direct read on whether the business is selling what it can make. A low figure is not fatal, but an unexplained one invites a pessimistic reading. Have the reason ready.

Is work in progress counted for drawing power?

Usually at a lower margin than raw material or finished goods, because it is harder to realise. A long conversion cycle therefore reduces the limit relative to the value on your books.

What schemes suit a manufacturing unit?

CGTMSE for collateral-free cover, PMEGP for a genuinely new unit, and state-level capital subsidies and technology upgradation support depending on your sector. Ask your DIC — the combinations available locally are frequently better than the national headline schemes.

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