Fund production machinery with hire purchase or leasing, and release cash from machines you already own with asset refinance. Cover the gap between buying materials and being paid with invoice finance, trade credit or a revolving facility. Larger manufacturers can combine invoices, stock and machinery into one asset-based lending facility that grows with the business.
A manufacturer pays for materials, turns them into products over days or weeks, delivers them, and then waits 30, 60 or 90 days to be paid. Meanwhile the machines that make it all happen need replacing, upgrading or adding to. That's a lot of money tied up before a single invoice is settled.
This guide covers what manufacturers borrow for, the finance that tends to fit each need, and what lenders look at, whether you run a small fabrication shop or a factory with several lines.
Where a manufacturer's cash goes
Follow the money through an order. Raw materials and components sit as stock, then become work in progress (WIP), meaning goods partway through production. Finished goods may wait before they're shipped. Then you invoice, and the customer takes its time. Every stage holds cash, and finance for manufacturers is mostly about releasing it, stage by stage, without borrowing more than you need.
Production machinery
For new or used machines, asset finance is the usual starting point. The lender pays the supplier and you repay over the machine's working life, and because the machine helps secure the deal, it's often easier to arrange than an unsecured loan of the same size.
The two main forms are:
- Hire purchase (HP). You pay a deposit, often with the VAT up front, then fixed instalments, and own the machine at the end. It suits machines you'll keep for many years.
- Leasing. You rent the machine and never own it outright. It suits equipment that dates quickly, such as some electronics and software-driven kit, or where you want predictable costs and an upgrade path.
Lenders value machines by what they'd fetch if sold. Well-known makes with an active second-hand market, such as standard CNC machines, presses and fork-lift trucks, get the best terms. Bespoke machines and production lines are harder, because more of the cost is soft costs, such as installation, software, tooling and training, which have little resale value. Expect a lower advance, a bigger deposit or a request for other security.
Our guides to hire purchase vs leasing and plant and machinery finance cover terms, deposits and how lenders value kit in more detail.
Releasing cash from machines you already own
If you own machinery outright, or have paid off most of its finance, it can secure new borrowing. This is asset refinance. The lender either takes security over the machines or buys them from you and leases them back, and you carry on using them while repaying over a new term.
It can release cash for materials, a large order or clearing more expensive debt. The lender will want an independent valuation, proof that you own the machines, and details of any finance still on them. Expect to borrow a share of the valuation, not all of it, and remember you're taking on repayments for kit you'd already paid for. Our guide to sale and leaseback explains when this makes sense and when it doesn't.
Raw materials and work in progress
Materials are often the biggest cash cost in a manufacturing business, and prices move. The main ways to fund them are:
- Trade credit. Longer payment terms from your suppliers cost nothing and grow with a good payment record. It's the first thing to ask for.
- A revolving credit facility or overdraft. You draw on it as you buy and repay as customers pay, paying interest only on what you use.
- Trade finance. If you import materials, a provider can pay your overseas supplier and give you a set period to repay, which covers the weeks the goods are in transit and production.
Work in progress is the hardest stage to borrow against. Half-finished goods are often worth little to anyone but you and your customer, so most lenders lend little or nothing against them. In practice, WIP is funded by the facilities around it: trade credit going in, and invoice finance coming out.
Invoice finance on business customers
If you sell to other businesses on credit, invoice finance lets you borrow against your unpaid invoices. A provider advances most of each invoice, commonly somewhere between 70% and 90%, often within a day or two, then pays you the rest, minus its fees, when your customer settles. It grows with your sales, which suits a manufacturer taking on more orders.
Manufacturing brings a few complications that providers will ask about:
- Invoicing before delivery. Providers generally fund invoices for goods already delivered. Invoices raised in advance of delivery, or for stage payments on long projects, may be excluded or funded at a lower rate.
- Customers who are also suppliers. If you buy from a customer as well as sell to them, they may offset what they owe against what you owe them. Providers usually exclude those amounts.
- Returns and credit notes. A high level of returns or disputes reduces what a provider will lend.
- Big customers. If one customer accounts for much of your sales, expect a limit on how much you can borrow against them.
You can choose a confidential facility, where you keep collecting from customers, or one where the provider runs your credit control. Our guide to invoice finance vs a business loan compares the costs and contract terms.
Asset-based lending: one facility, several assets
As a manufacturer grows, it can make sense to combine everything into one facility. Asset-based lending (ABL) does this. The lender sets a borrowing limit based on several assets at once, usually your invoices, your stock and your plant and machinery, and sometimes property. Each contributes a share of its value.
The amount each asset contributes is set by the lender. Invoices usually support the largest share, because they turn into cash soonest. Stock usually supports a lower share, often based on what it would fetch in a quick sale, and finished goods with a ready market count for more than specialised components. Machinery is usually valued independently.
The appeal is a larger, more flexible facility than any single product would give you, which rises as your sales and stock grow. The trade-offs are more reporting, regular checks by the lender, conditions you must keep to (often called covenants), and set-up costs that make ABL better suited to established businesses with a solid level of turnover than to small firms.
Funding a large order
A big new order is good news that can still break your cash flow, because materials, staff and overtime are paid months before you can invoice. Before borrowing, ask the customer for a deposit or stage payments, which is a reasonable request on a large or custom order. Ask your suppliers to extend terms, since they gain from the order too. And check the margin: large customers negotiate hard, so make sure the finance costs still leave a profit.
Then fund each stage with the facility that suits it: a revolving facility or short-term loan for materials and wages, and invoice finance once the goods are delivered. Some specialist providers fund the materials for a confirmed order and are repaid from the invoice, though this suits some orders better than others.
An illustration, not a quote. A metal fabricator wins a £240,000 order, to be delivered in four monthly batches and paid 60 days after each delivery. Materials and extra labour cost about £40,000 a month before the first payment arrives. The firm negotiates 60-day terms with its steel supplier, draws on a revolving facility for the wages, and puts each batch invoice through its invoice finance facility, releasing 80% within days of delivery. A new press brake for the order goes on hire purchase over five years. These figures are illustrations: your terms depend on your business and your customer.
Capital allowances, briefly
Tax relief can make a big difference to the real cost of machinery. The Annual Investment Allowance (AIA) lets most businesses deduct the full cost of qualifying plant and machinery from their profits in the year it's bought, up to £1 million a year. It covers new and used machines, and machines bought on hire purchase can usually qualify once they're in use. Leased machines don't, because you don't own them; you usually deduct the rentals instead.
Companies buying new, unused machinery may also be able to claim full expensing, which deducts the full cost in the year of purchase without the AIA's limit. The rules and current limits are on GOV.UK's capital allowances pages. Ask your accountant which allowance suits a purchase before you choose how to fund it.
Comparing the options
| Need | Often funded with | Watch out for |
|---|---|---|
| New or used machinery | Hire purchase or leasing | Soft costs on bespoke kit |
| Cash from owned machines | Asset refinance or sale and leaseback | Repaying for kit you'd paid off |
| Raw materials | Trade credit, revolving credit or trade finance | Price rises outpacing the facility |
| Slow-paying customers | Invoice finance | Pre-billing and offsetting balances |
| Several assets at once | Asset-based lending | Reporting, covenants and set-up costs |
| A large order | Deposits, supplier terms, revolving credit, invoice finance | Margins squeezed by finance costs |
What lenders look at
Expect questions about:
- Accounts and management figures. Usually two or three years of accounts, plus recent management accounts showing margins, stock levels and what customers owe you.
- Your order book and customers. Who you sell to, how reliably they pay and how much of your work comes from the largest.
- Your machinery. Make, age, condition and any existing finance, often confirmed by a valuation.
- Stock records. For stock-based lending, how well you track what you hold and how quickly it moves.
- Existing borrowing and whether any lender already holds security over your assets.
Directors of limited companies are often asked for a personal guarantee. Lending of £25,000 or less to sole traders and small partnerships is regulated by the FCA. Lending to limited companies and LLPs is generally unregulated.
Common mistakes
- Funding materials with long loans. Short-term needs belong on short-term facilities.
- Taking a large order without costing the cash gap. Profit on paper doesn't pay the steel supplier.
- Ignoring soft costs. On a new line, installation and tooling can be a large part of the bill that asset finance won't fully cover.
- Choosing finance before the tax position. HP and leasing are treated differently, and the difference can be large.
- Several lenders with overlapping security. Separate facilities from different lenders can restrict each other. Check what each one's security covers.
Questions people ask
What is asset-based lending?
Asset-based lending is a facility secured on several business assets at once, usually invoices, stock and machinery. The lender sets a borrowing limit from a share of each asset's value, and the limit moves as those assets change. It usually suits established businesses with a solid level of turnover.
Can I refinance machinery I already own?
Yes. Asset refinance lets you borrow against machinery you own outright or have built up equity in, either secured on the machines or through a sale and leaseback. Expect a valuation, and to borrow a share of the value rather than all of it.
Can I get finance for raw materials?
Yes. Start with longer supplier terms, then use a revolving facility, invoice finance or, for imports, trade finance. Specialist providers can also fund materials for a confirmed order and be repaid from the invoice.
Can machinery on hire purchase qualify for capital allowances?
Usually, yes. Machinery bought on hire purchase can generally qualify for the Annual Investment Allowance once it's in use, and companies may be able to claim full expensing on new machines. Leased machines don't qualify, but you can usually deduct the rentals. Check GOV.UK or ask your accountant.
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This guide is general information, not financial advice. Rates, rules and lender criteria change, so check the details with your broker or lender before you sign anything. Lending Lenny is not a lender.