Financing is a worry for every business, especially when there are capital-intensive projects on the horizon. Whether it's about building afresh or making large-scale changes to the current facilities, factory building is a costly project to undertake.   

While most casual observers may believe that companies should be able to self-finance huge factory projects, most business owners and executives know that the reality is very different. The distribution model of many manufacturing companies means that while they may be worth a whole lot, they don't often have excess working capital. Even if a company did have extra working capital, such that it can afford to build a factory, it would likely overstretch its finances for a while. Overstretching your business' finances can have dire consequences in the event of unexpected circumstances, which can be anything from aggressive competitors to natural phenomena.

In this piece, we will be exploring the best financing options for both new and already-existing businesses. We'll also try to highlight the best options for each situation. 

Manufacturing Loans

Traditional banks are one of the best options for obtaining loans for setting up a manufacturing plant. They typically offer competitive rates and terms for businesses. They also offer multiple financing products like line of credit, equipment financing, and real estate loans, all of which can come in handy for business.

They, however, have the disadvantage of being difficult to obtain. Banks are typically looking to give out loans to businesses that offer the least risk. There's also a high amount of documentation that's required to obtain loans from traditional banks. The back and forth needed to get these loans can make them less appealing for a business looking to move fast.

Small Business Administration Loans

These loans are an excellent option for organizations that have issues securing loans from traditional banks. They typically require similar terms like conventional loans, with the exception that they are backed by the government.

SBA loans are a government stimulus package where the government covers a large portion of the losses lenders encounter, encouraging them to provide more funding.

Asset-Based Lending

Mid-sized manufacturing companies, in particular, have a hard time financing capital projects off their books. For a lot of them, asset-based lending offers an alternative route of funding that's typically easier than traditional lending from financial organizations.

Asset-based lending allows organizations to use their assets to access financing. With asset-based lending, companies can use their assets as collateral to determine their borrowing base. These loans typically operate as a revolving line of credit, especially when accounts receivable and inventory are used as the base. Typically, companies can finance up to 75% of their accounts receivable. For assets and inventory, they may be able to obtain up to 50% of the value of the assets. 

Asset-based lending can be used to prop up your working capital before making huge investments. It also has the unique advantage of being, perhaps, the fastest financing solution for organizations. The speed of execution of asset-based loans is down to the minimal paperwork required for it. It's ideal for cases where you have to expand your factory capacity quickly to meet growing demand.  

Equipment Financing

For the potential that this mode of financing offers, it's grossly underrated. Equipment finance is a financing option specifically designed for businesses that need to purchase new equipment, but don't want to spend on it upfront. For most companies looking to build a new factory or upgrade an older one, the above statement accurately describes them.

Equipment loans are ideal for businesses looking to purchase long-term assets outright. The equipment to be bought is typically used as security for the loan. In the case that the loans can't be paid up, the equipment is then collected as collateral by the lender. They can be used to purchase equipment, even if you intend to make use of industrial fabrication services to make them. Lending institutions offering equipment loans traditionally cover between 80–90% of the cost of the equipment, leaving your organization to cover the remainder. The obvious downside to this is that the equipment will end up costing more than if you had bought them outright.

Factoring

As mentioned earlier, the sales and distribution model of a number of manufacturing companies can leave them cash-strapped if not well-managed. If that's the situation in your business, then you should work on creating a better structure. However, if, in the meantime, you urgently need funds to improve your factory, factoring provides an excellent alternative. Instead of waiting 30 to 60 days to clear your invoices with your clients, you can use those account receivables to get a cash injection. 

A factoring company typically purchases the outstanding invoices and forwards the business anywhere between 70–90% of the value of the invoices. The practice is also known as invoice financing. A fee of 1% is usually charged for every week that the invoice goes unpaid. After the invoice is paid, the factoring company returns the balance to the selling business. 

While it's quite expensive to obtain, factoring is ideal for businesses that need to free up cash quickly. If your project requires you to move fast, you should consider it.

Conclusion

Taking in external financing for a factory project comes at a cost. This is why it's something to be approached with care. As has been highlighted, there are multiple options to choose from. The best option for individual businesses will vary based on their needs and current situation. It's vital to explore all options to see which will be the best fit for your needs.

It's also imperative to speak with multiple finance providers to know which have the best rates. In most cases, finance providers will offer competitive rates if they are aware that you're talking to other people.