Securing Capital to Grow and Innovate

Fueled by advances in materials, automation, robotics and connectivity, American manufacturing has entered an era of opportunity. Innovative tools and technology capable of improving efficiency, cutting costs and enhancing the performance of factories have the potential to revolutionize processes and productivity. At the same time, a business-friendly administration in Washington and greater economic optimism broadly are opening up access to capital and debt markets for those willing to invest in the necessary machinery, software and talent to deliver on that potential.

As a result, manufacturers seeking funding for equipment, expansion or M&A activity have a wide array of options, Terence Begley, CEO of corporate banking at PNC, told participants in two roundtable discussions on securing capital held during Chief Executive’s Smart Manufacturing Summit, co-sponsored by PNC. “There is a lot of money out there—bank money, private equity money, equity market money—right now for making these types of investments,” Begley noted. “The tricky part is when do you lock that financing up? Do you wait or do you do it now?”

SIGNS OF A SPENDING SHIFT
Despite greater access to funding, many manufacturing companies have taken a wait-and-see approach to capital expenditures in recent years—although research suggests that may be changing. In 2016, concern about turbulence in the global economy and uncertainty around the outcome of the presidential election had many companies in a holding pattern on capital expenditures.

With confidence higher this year, the National Association of Manufacturers anticipates an uptick in capital spending of about 2.1%, according to its NAM’s First Quarter 2017 Manufacturers’ Outlook Survey. Among survey respondents, 41.6% reported expecting to spend more on capital investments in 2017 relative to 2016, 39.4% anticipated spending to be unchanged, and just 11.7% expected to invest less.

At the same time, many CEOs who recognize the need to update manufacturing equipment and processes find the prospect of seeking financing for such investments daunting.

In fact, the very pace of innovation driving the need to update equipment has a flip side when it comes to capital expenditures. “With smart manufacturing, the useful life of the assets we’re employing could be a lot shorter than we ever planned them to be—and the other assets, the intangibles, may play a bigger role,” said Shamus Hurley, CEO of Parkson, a provider of advanced solutions in water and wastewater treatment, who pointed out that asset-based borrowing becomes more complicated in an exponentially evolving market.

Manufacturing companies that traditionally obtained financing by offering machinery as collateral now find themselves needing to fund programs to train employees on new technology or invest in proprietary software, agreed Teri Jensen, vice president, finance, of the custom packaging company Utah Paperbox. “We’ve always been able to highly collateralize our financing,” she said. “Thirty years ago, when I bought a printing press, I planned to use it for 15 to 20 years. Now the latest and greatest technology is going to be out the next year.”

Such concerns are more common in today’s lending environment, and banks have developed ways of addressing them, noted Jill Gateman, executive vice president at PNC. “We are completely different bankers today than we were eight years ago, and the most transformational piece of that is that we’re advisors,” she said. “We have a lot more tools and do a lot more preparation so that we can really understand a company before we go out on a call. We bring peer analysis, which is something that small privately held companies really enjoy seeing—how they stack up against peers. And it really helps us understand companies in situations like that.”

“We spend a lot of time with our company prospects doing due diligence,” agreed Begley. “To be blunt, we probably are not as comfortable with collateral as we used to be, but if we believe in the company, who they’re selling to, the product and the long-term strategy, we can get a lot more comfortable.”

Several roundtable participants outlined specific funding challenges, one being that most banks are still primarily numbers-oriented, relying entirely on P&L statements and tax returns to assess a company’s capital-worthiness. “All they want are numbers, numbers, numbers, and there’s no real relationship,” said Jerad Higman, president of mining equipment manufacturer Masaba. “They give you an umbrella when there’s sunshine, and then guess what happens when it rains? They want it back.”