Manufacturing is having a moment.
From custom 3-D printed cars to bandages that can provide health readings to photonics technology that is making Hollywood sci-fi fantasies real, manufacturers are deploying cutting-edge technology to improve their processes, offer better products and boost the productivity of the American economy.
This revolution in manufacturing, which has emerged as the industry has recovered a million jobs post-recession and charged to a $2.17 trillion contribution to U.S. gross domestic product, doesn’t come cheap. U.S. manufacturers made nearly $175 billion in capital expenditures in 2014, according to the U.S. Census Bureau. Of this, almost $140 billion went to machinery and equipment and $33 billion went toward real estate.
Fueling those capital investments, and the manufacturing revival, are our nation’s banks. More than almost any other industry, manufacturing is a capital-intensive business with a tricky cycle of cash flow and payments, and the financing and services that banks provide help manufacturers access the latest technologies, keep their production lines running and pay the 12.3 million men and women who work in manufacturing, a figure reported by the National Association of Manufacturers.
Meet Chad Odom, CEO of Encore Container in Greenville, S.C. Odom makes and recycles bulk packaging materials, such as plastic drums. As his business grew, he decided to expand into several-hundred-gallon intermediate bulk containers, which require a specialized two-story, 100-foot-long machine to produce. “We were able to find the perfect machine,” he says. “The problem was that it was in Italy”—and needed to be specially packed and shipped at great expense.
After tapping their own resources, “we needed a next level of funding to help us get to the finish line,” Odom says. He turned to United Community Bank, a $10 billion institution based in Georgia but with a large local operation in Greenville. “They understood what we were trying to do…and they made things happen very quickly,” he says.
Rich Bradshaw, president of specialized lending at United Community Bank, sees advantage in being a local partner for Greenville’s large manufacturing sector, which includes Michelin, BMW, GE, Hubbell Light and others—plus the massive network of manufacturers that supply the big players. “Because we’re smaller and flatter in terms of decision making, we’re much more nimble, and we’re going to be able to get to that ‘yes’ or ‘no’ a lot faster,” he says. “We have the balance sheet to do those loans and the nimbleness to get there a lot faster.”
The diversity of the banking industry means that there are a wide variety of financing options available to manufacturers, local and nationwide, whether from community banks, specialty lenders, regional banks or large nationwide banks. Crestmark Bank, for example, is an $850 million institution based in Troy, Mich., with a sole focus on financing and cash flow for businesses across the country.
With Michigan’s historic strength in manufacturing, the sector remains Crestmark’s “bread and butter,” says founder and CEO David Tull, who notes that manufacturing accounts for about 30 percent of Crestmark’s loan portfolio. Because of Crestmark’s unique focus for a bank of its asset size, it gets up to three-quarters of its business through referrals from other banks that may not be able to do what a specialized lender does.
Banks offer a variety of credit options for their manufacturing customers. At the $24.5 billion Commerce Bancshares in Kansas City, Mo., “we have a nonbank subsidiary through which we’re able to do private placement of tax exempt bonds,” says Kevin Barth, head of the company’s commercial banking business. “A lot of the equipment you use in manufacturing can qualify for tax-exempt financing, and it can result in substantial savings.”
Guarantee programs through the Small Business Administration provide banks like United Community and Crestmark with additional options for meeting customers’ financing needs. United Community does $200 million in SBA loans each year, and the guarantee can vastly open up options for manufacturers, Bradshaw says.
Consider a $400,000 SBA loan for a computer numeric control machine commonly used in today’s advanced manufacturing workplaces. “Typical commercial financing or leasing is going to have that [repayable] at five to seven years,” Bradshaw says. “We’re going to do that out to 15 years.” The extended payment cycle can free up $50,000 per year in cash flow, he adds, a “huge advantage to that manufacturer.”
Cash (flow) is king
Manufacturers operate on a long and complex “cash cycle” from raw materials to inventory to sales to receipts, Tull notes. In automobile manufacturing, for example, “the turnover of the cash doesn’t often coincide with the need for cash. The cash is going to be there, so it’s just a timing issue.” The customary way of looking at accounts that are past due for 30, 60 or 90 days “may not fit the cycle of a particular company,” he adds.
Thus, in addition to a range of financing options for manufacturers, Crestmark also purchases clients’ accounts receivable, providing an advance on the balance and managing invoicing and collection on behalf of the client. This kind of service smooths the cash flow for the manufacturer, allowing for prompt payroll and purchases of supplies.
PNC Bank, a $345 billion super-regional bank operating across the eastern and Midwestern U.S., offers its manufacturing customers its CFO program (for Cash Flow Optimized), which powers an online financial management platform that helps small business customers better handle variable cash flow. CFO’s interface combines bank account info, customer and vendor payments and accounting data together in one place.
For banks, financing is thus just one part of the picture. “Even if a customer comes to us from the angle of the loan, we’re exploring all of it to make sure it’s as efficient as possible,” says Nick Spanakis, group practice manager for specialty segments at PNC. He cites a manufacturer with a part-time accountant who processed card payments for their products over the phone. PNC helped the client professionalize their invoices and offer electronic payments to customers. “What they did not realize was that this would speed up their receivables,” Spanakis says. “It made their cash flow a heck of a lot more efficient.”
Beyond cash flow, manufacturers also rely on banks for a variety of services. For example, Commerce Bank offers a foreign exchange group to help manufacturers with overseas activity hedge their foreign currency exposures and pay overseas suppliers with lower exchange rates.
One Commerce Bank customer makes large equipment used in offshore oil production, Kevin Barth notes, with up to half of its sales abroad. “We work with them not only to help expedite the exporting of those products, but also to establish the reserves they need to establish, he says. “We’ve helped them expand their business to at least 10 different companies.”
Banks also connect manufacturers with external resources to help them grow and become more efficient. PNC recognized Independent Prosthetics-Orthotics, a medical device manufacturer in Delaware, as one of its top-performing clients and connected IPO with the Delaware Manufacturing Extension Partnership, a public-private alliance. DEMEP helped the company apply for grants for training and development of lean processes that allowed the manufacturer to save more than $87,000. “We’re constantly looking for ways to add value,” Spanakis says of PNC’s relationships with manufacturers and regional MEPs.
So while manufacturers have their moment, banks are behind the scenes as partners, providing critical financing, cash flow and services. “We step in to finance growth,” Tull says.
This article originally appeared in the ABA Banking Journal.