Key points
- A manufacturer's cash conversion cycle is long: materials are bought, converted and shipped well before customers pay.
- Machinery, stock and receivables are real assets, so asset-based lending and asset finance feature heavily in the sector.
- Owned machinery can sometimes be refinanced to release cash, but gearing against falling equipment values is a trap.
- Several hire purchase and loan agreements can often be consolidated, though a longer term usually increases the total repaid.
- Covenants, retention of title clauses and customer concentration all affect what providers will lend.
Cash-flow realities in manufacturing
The cash conversion cycle is the number of days between paying for inputs and being paid for the output. In manufacturing it is often the longest of any sector. Steel, resin or components are bought on 30 day supplier terms, pass through production over several weeks, and leave as finished goods on 60 or 90 day customer terms. The business can be funding a single order for four months, and a profitable manufacturer with a full order book can still run short of cash.
Three other features of the sector matter to anyone lending into it:
- Machinery and tooling. CNC centres, presses and bespoke tooling are expensive, usually bought on hire purchase or lease, and carry breakdown risk. A failed machine stops output and the cash it produces.
- Energy costs. Energy-intensive processes face price swings that cannot always be passed on under fixed-price contracts.
- Customer concentration and export terms. A handful of large customers often dictate payment terms. Export sales add longer terms, currency exposure and paperwork before payment is released.
Suppliers commonly include a retention of title clause, meaning they keep legal ownership of materials until paid. A provider lending against stock cannot rely on goods the business does not yet own, so supplier terms are usually checked before a stock facility is agreed.
Finance options that fit manufacturing, and why
Asset-based lending
Asset-based lending is a revolving facility secured on receivables, stock and plant together. It suits manufacturers because it lends against the assets the cash cycle creates, rising as invoices and stock rise and falling as customers pay. Advance rates are usually higher for approved debtors than for raw materials or work in progress. The facility can repay existing lenders as part of a wider refinancing of business debt.
Asset finance and refinancing owned machinery
New equipment is usually funded through hire purchase or leasing. Machinery already owned outright can sometimes be refinanced to release cash. In general terms, a sale and leaseback sells the equipment to a provider and leases it back, while a refinance keeps ownership and grants the provider security. Both depend on an independent valuation, and bespoke machinery often values poorly because few other businesses could use it.
Invoice finance
Invoice finance releases a percentage of each approved invoice soon after it is raised, so a 90 day term no longer means a 90 day wait. Invoice discounting lets the manufacturer keep collecting its own debts, often confidentially; factoring passes collection to the provider. If one customer dominates the ledger, the provider may cap the advance against that name.
Consolidating multiple HP and loan agreements
A manufacturer that has added machines one at a time often has several hire purchase agreements, a term loan and an overdraft. Consolidating business debt into one facility can simplify the monthly outgoing and, where the term is longer, lower it. More months usually means more total interest, and settling hire purchase early may involve fees.
Working capital finance
Where the problem is a specific bulge, such as a large order needing upfront materials, a short-term working capital facility may fit better than restructuring the whole balance sheet.
Risks specific to manufacturers
Over-gearing against machinery. Equipment values fall with age, and a forced sale realises far less than an in-use valuation. Borrowing the maximum against plant leaves no margin if trading dips, and missed payments can lead to repossession, which stops production.
Covenants. Asset-based and secured facilities usually carry covenants: debt service cover, gearing, stock audits and customer concentration limits. A breach can let the provider cut advance rates or demand repayment. Model them against a realistic downturn before signing.
Questions to ask before you borrow
- How many days is our cash conversion cycle, and is the facility sized to that gap or to a hopeful forecast?
- Which assets will be charged, and what happens to production if the provider enforces its security?
- Do supplier contracts contain retention of title clauses that limit borrowing against stock?
- What are the covenants, how often are they tested, and what headroom do we have?
- Will a personal guarantee be required from directors as well as the security?
Our article on how to compare business finance offers shows how to put two differently structured facilities side by side. If payments to suppliers or HMRC are already being missed, read our cash flow problems page and consider free, impartial guidance from Business Debtline before borrowing more.
Related sectors: construction firms and transport and logistics businesses, or see the industries overview.
Frequently asked questions
Can a manufacturer borrow against machinery it already owns?
Often, yes. Providers usually ask for an independent valuation and lend a percentage of the forced-sale value. Resaleable equipment attracts better terms than bespoke tooling, and any existing charge must be released first.
Does a retention of title clause stop me getting stock finance?
Not necessarily, but it reduces what a provider will count. Materials still owned by the supplier are usually excluded from the borrowing base until paid for, and widely drafted clauses can affect finished goods too.
Is it sensible to consolidate hire purchase agreements into one loan?
Sometimes. It simplifies payments, but hire purchase is often competitively priced, early settlement may carry a charge, and a longer loan can increase the total repaid.
Will export invoices be accepted for invoice finance?
Many providers fund export debtors, subject to the country and the customer's credit standing. Some require credit insurance on overseas names.