Jamie Yelle, president of Royell Manufacturing, added that it’s tough to find lenders willing to finance organic growth for a capital-intensive company that manufactures components for the aerospace industry.
“The bigger you get, the more your customer demands,” he explained, noting that bid packages for [some of our] clients can run $10 million-plus. A project of that size, in turn, requires upfront investment by Royell, which is also in the process of automating operations. “We’re going to more and more automation as we move toward 24/7 [production],” said Yelle. “So you’re talking about a half a million dollars for every asset you buy. It’s all opportunities, but to take advantage of them takes money. Getting an operating line is easy for us, but I find that banks begin to get nervous about that kind of rapid growth at some point.”
What’s more, because of the way manufacturing is evolving, the value of the type of investments some manufacturers need to make can be difficult to quantify. All America Threaded Products employs decades-old legacy CNC machinery that requires expensive maintenance and updating, rather than replacement. “Finding a
way to finance the capital expenditure required to keep a 10-year-old machine running and to automate, add sensors and connect it to an ERP system becomes a challenge for us,” said Casey Broderick, president of All America Threaded Products, a division of the metal manufacturing company Acme Manufacturing.
Often, the best solution to challenges like these is for companies to take a proactive approach to accessing capital, noted Begley, who outlined a “rainy day” strategy. “A lot of companies are taking it for granted that there’s a lot of liquidity in the markets and that they’ll be able to get money when they need it even though they don’t actually have it lined up,” he said. “But lining up extra money early while the lending environment is favorable is a good way to make sure you’ll have what you need when you do need it. It sounds obvious, but often it doesn’t happen.”
For Erika Meciar, CEO of electronic components manufacturer Laco, a five-year growth spurt has culminated with an opportunity to gain a competitive edge—one that the company must now figure out how to fund. “Funding is definitely one of our biggest challenges at this point,” she said.
Lewis Tree Service, on the other hand, recently drew on a line of credit to acquire a competitor. “We acquired a competitor primarily for their business, but also for their talent,” said Bob Petrone, vice president of finance. “Some of their people became executives at our company, so both aspects worked out to our
Companies that don’t routinely pursue growth through acquisition often lack the financial firepower to pounce when such an opportunity arises, said Begley, who pointed out that companies that see acquisition as a potential growth path would do well to start securing financing early.
“Companies that are acquisitive by nature are often better about putting away a rainy day fund or adding to their credit line because they know the worst time to go to a bank is when you have to sign a letter of intent by tomorrow,” he said. “Those who aren’t acquisitive by nature have the opposite problem: They don’t want to overpay for credit so they only finance for their present needs. Then when they have an unexpected need, they find it’s tricky or too expensive to get financing. The worst time to borrow money from a bank is when you’re in trouble or when you have a live acquisition in the works.”
In addition to having the wherewithal to take advantage of opportunities as they arise, companies that line up access to capital now can take advantage of today’s favorable lending market. For example, CEOs with floating rate loans may want to talk with a banker about refinancing to a fixed rate.
“A good relationship bank can help you design a financial plan you can live with today that hedges you against some unforeseen event or rate spike,” concluded Begley. “No one knows whether the [low interest rate environment] will end gradually or change overnight if a crisis causes credit markets to pull back fast. But there’s no question that the rate environment is changing.”