Are You Poised For Growth?

The U.S. manufacturing sector continues to have strong growth expectations, in both annual revenue and hiring. Yet according to the IndustryWeek research report, “The Future of Manufacturing: 2020 and Beyond,” market volatility, rising material costs, price reduction pressures, and increasing labor costs are significant barriers to meeting these growth challenges. It is critical that manufacturing companies, regardless of size, understand their capital options so that they can make critical investments to improve productivity and efficiency. In evaluating these options, for many companies, finding the right financial partners is an increasing imperative on the mind of many CFOs.

Investing in growth

Meet Jack Hanson. Jack runs a small manufacturing company that delivers key parts in the aerospace industry supply chain. In the midst of bidding for several multi-year contracts, he is poised for growth. And like many of his peers, he knows that optimizing capacity utilization, managing rising labor costs, and navigating competition for skilled workers will be critical to achieving profitable growth. This pressure to increase his efficiency is compounded by his fears that competitors are gaining an edge in product quality and client satisfaction.

To continue to thrive, Jack needs to upgrade several pieces of equipment to improve productivity while simultaneously reducing labor costs.  As Jack evaluates his options, he considers using cash to make the purchases but quickly realizes this will compromise other investments on the horizon.  Jack recognizes that using cash will also require significant focus on maintaining his operating ratios and may impact the covenants he has with existing financial partners.

In assessing his credit options, Jack must determine the changes in business metrics (increased sales; higher productivity; lower costs) he must generate to achieve a return that would make these smart investments.   Jack could tap into a line of credit with the bank that he’s done business with for eight years to help finance the equipment purchases. However, this unsecured line of credit isn’t the most affordable form of credit he could access, and may limit his future flexibility with regard to debt structures. Jack realizes he wants to preserve this line of credit for ongoing operating expenses and unforeseen expenses. He can’t afford to leave key suppliers unpaid, but more importantly, needs working capital to run his business on a day-to-day basis.  Given this situation, Jack knows that specialized equipment financing may be an attractive option for him.

Ensuring diverse capital options

According to Banking Strategist, merger and acquisition activity among smaller community banks (community banks make up 97 percent of all banks) continues to rise. Consolidation of banks, large and small, has steadily increased since the 1970s, so M&A activity in the financial industry is nothing new. As banks consolidate to streamline productivity and cut costs, however, they are focused on traditional offerings. The result has been a steady decline in small business lending over the last 10 years compared to a concurrent 8-year growth in overall commercial lending.

Wheeler Financial from Pitney Bowes was created to fill the specific need of small and middle market businesses looking to invest in equipment and technology essential for growth.

“Small businesses are the very lifeblood of our economy. They are critical to growth and job creation in the United States. Now, more than ever, today’s manufacturers are focused on improving productivity and efficiency that allow their business to become essential to customers and a formidable competitor in the expanding domestic markets,” said Christopher Johnson, SVP & President, Pitney Bowes Financial Services.

The Jack Hanson scenario is a common one and represents the kind of situation facing many clients in Wheeler Financial’s target markets.  These companies seek to gain a competitive advantage and improve their operations by making smart buying decisions. Now more than ever, businesses need a capital partner who is willing to work with them to optimize growth opportunities. For while small businesses have been growing dramatically over the past ten years, a lack of financing options continues to be a significant barrier to future success. Even as many companies have great relationships with their primary bank, limiting themselves to a single source of capital leaves them vulnerable to market changes and industry consolidation.  And as capital pools shift away from risk-based assets, loans will likely be harder than ever to secure.

Selecting the right partner is not easy either. It’s important to work with companies that understand the in-depth needs of a small business and can draw upon significant domain expertise to create viable structures for your unique needs. Today there are several options, from specialized groups within banks to independent financial companies and online platforms. Whomever you choose, it’s important you look beyond the immediate transaction and the viability of a longer-term, lasting relationship to establish the best path forward for your specific needs.