Financial challenges and best financing options for manufacturing companies

 In Accounts Receivable Factoring, Alternative Financing, Asset-based financing, inventory financing

The manufacturing sector is incredibly diverse, encompassing everything from consumer toys to construction equipment to electronics to furniture to food products. Because of this, the financial challenges experienced by manufacturing companies and the financing options that can help them overcome those challenges can be very different from company to company.  

But there are a number of business realities shared by many manufacturing companies, no matter how different they look on the surface. 

Financial realities for manufacturing companies

For all their differences, manufacturing companies can be similar when it comes to these financial realities. 

High operating costs, including the cost of raw materials, labor, storage, and equipment. These expenses tend to remain constant even during financial downturns or slow markets, which can create significant financial stress.  

A highly competitive environment. For manufacturers of many types of products, there are many other companies that have similar products on the market, which puts downward pressure on pricing and margins.

Problematic cash flow. Long lead times and shipment times followed by payment terms of more than 30 days can result in high accounts receivable and accounts payable balances. The issue of cash flow for manufacturing companies has become even more critical than ever as hiring costs, material and energy costs, and inflation continue to rise.

Difficulty obtaining bank financing. Because of their high operating costs and unpredictable cash flow, manufacturing companies can be perceived as more financially volatile than other types of businesses, making it harder for them to obtain a traditional bank loan or line of credit. 

Other trends placing financial pressure on manufacturing companies include consistently high interest rates and a high cost of debt, persistent supply chain issues, and the prevalence of commercial bankruptcies. 

Manufacturing company financing options

For manufacturing businesses that need to increase available cash but are unable to qualify for a traditional bank loan, these alternative financing options could fill the gap.

Manufacturing equipment collateral loans

For manufacturing companies that don’t meet traditional lending criteria, an equipment collateral loan may be an option. This type of secured loan uses high-value business equipment as an asset that the lender can possess if the loan is not repaid. 

High-value assets can include industrial equipment, packaging equipment, pharmaceutical equipment, food processing equipment, and other machines used in the manufacturing process. 


Because it is secured, this type of loan can be obtained by businesses with a lower credit score. It is also likely to offer lower interest rates than an unsecured loan. 

Depending on the value and condition of the equipment offered as collateral, larger loan amounts may be available.

Paying off this type of loan can help to build a better credit score. 

You will need to pay for an independent valuation for the equipment offered as collateral. 

If your equipment is highly specialized, you may not be able to borrow against it because it’s harder for the lender to sell it in cases of nonpayment.  

If you fail to make loan payments promptly and in full, you risk losing vital equipment to repossession. 

Manufacturing equipment financing

Equipment financing is a way for manufacturing companies to acquire expensive equipment or vehicles without having to tie up cash in a capital purchase. 

This type of financing can take the form of a loan or a lease. An equipment loan uses the equipment to be purchased as collateral. An equipment lease requires the business to make regular payments in exchange for the use of the equipment, and there may be an option to purchase the equipment when the lease ends. 


A great way to acquire new equipment to continue operations or expand the business.

With an equipment loan or lease, you can free up working capital that would otherwise be tied up in a capital asset. 

You will also pay relatively low interest rates compared to other types of loans. 

Upgrading to better equipment is also easier when the equipment is leased.

Often only an option for new equipment, as used equipment will have depreciated.

While equipment financing is easier to qualify for than other types of loans, new businesses may still be disqualified. 

Although the interest rates are lower for equipment leases, they can still represent a considerable business expense.

Some companies end up paying more for the equipment than it is worth when the interest is factored into the cost. 

Inventory financing 

This type of financing involves a short-term loan or line of credit that uses a company’s product inventory as collateral.

Companies that are confident in finding buyers for their products, but who haven’t yet invoiced or received purchase orders for the items, may find inventory financing a helpful way to access the cash they need to operate their business. Companies with a seasonal or highly variable sales cycle may decide to use inventory financing to smooth out cash flow. 


This type of financing makes cash available even if the company has no high-value assets, such as vehicles, equipment, or real estate, to use as collateral.  

Companies without a strong credit score or lengthy credit history can still qualify for inventory financing. 

Payment against the loan or line of credit is made automatically as the inventory is sold. 

Funds from inventory financing can only be used to purchase more inventory or the materials required to create it. 

Loan amounts are usually limited to no more than to 50% of the inventory cost.

These types of loans typically charge higher interest rates than traditional bank loans or lines of credit. 

Invoice factoring

Invoice factoring enables a company to turn their accounts receivable (AR) into cash as soon as they issue the invoice instead of waiting 30 days or more for payment from the customer. The business can access as much as 95% of the value of their outstanding invoices immediately, with the remainder being remitted to the business once the invoices have been paid.

Depending on the factoring company they work with, a company may be able to factor all their receivables or just a small percentage of them, making this a very flexible borrowing option suitable for short-term or long-term use.


Invoice factoring is available to companies with a low credit score or limited credit history. 

Companies can access cash within days of applying to factor their invoices. 

There are no restrictions in terms of how the funds can be used by the company. 

Factoring does not negatively affect a company’s credit score or add debt to their balance sheet. 

Factoring can be used as a short-term solution to bridge a funding gap or as a long-term means of solving recurring cash-flow challenges. 

Companies in retail do not qualify for invoice factoring: they must sell to business or government customers. 

While factoring is significantly less expensive than other forms of alternative financing,  it is more expensive than a traditional bank loan or line of credit. 

Factoring can involve restrictive contracts and non-refundable administration fees.* 

*Note that AR Funding does not charge admin fees, offers flexible contracts as short as 90 days, and lets clients choose which invoices to factor.

For more information on invoice factoring for manufacturing companies, read this case study for a dental manufacturer who secured a $500,000 factoring line from AR Funding. 

Explore your financing options

If your manufacturing business needs cash to smooth out cash flow or finance growth, talk to us to see whether invoice factoring is the right fit.

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