Many manufactures of all shapes and sizes in the defense supply chain are experiencing a surge in new business. However many are not able to fully take advantage of the boom in business because of the hard choices and sacrifices made to survive during the lean years following the federal budget sequestration in 2013. With capital reserves depleted and friends and family funding sources tapped out, manufactures are looking to lenders and investors to provide the capital they need to grow. The most common capital need scenarios that an operating business has includes;
- Working Capital
- Debt Restructuring
- Asset Purchase
- Growing your business
In the case of working capital, suppliers seek a loan to cover short term expenses that will be repaid with their current business revenues. The supplier may use the money to span the gap between payments to suppliers for the raw materials and income from customer for the completed orders. For example, a small manufacturer with 30 employees won a big order from a defense prime and expects to deliver 5 parts a month for the next 2 years. Payment is a fixed fee that is doled out based on delivery of the parts- which is just in time for the customer’s projected assembly time frame. This firm is looking for a working capital loan to cover the cost of materials and labor to make the parts in the timeframe that makes the most sense to their bottom line and will net their firm the most profit.
In other cases a supplier has existing debt they want to restructure or consolidate several loans to make the payment more manageable. Restructuring debt facilitate financial planning by reducing the number of payments and may reduce total amount paid- freeing up cash flow so it can be used for business expansion, working capital and/or as increased profits. A medium sized supplier with 150 employees recently sought to restructure their debt to consolidate loans used to purchase machines, build a new building, and an old working capital loan. Each of the loans had different interest rates and terms. The consolidation loan had a lower payment than the combined total for the other loans.
We also hear from manufactures that want to grow and need capital for asset purchases. A supplier that has what they need operating expenses may want a loan to cover the purchase of new assets so the business can expand- basically spreading the costs of an expensive new asset over a few years. A local defense supplier has reached the tipping point, where the amount of sustained business has maxed out their capacity and they need to grow. This firm is looking for funding to expand into the adjacent space in their building, purchase 4 new machines, add electricity capacity, and hire new workers. Normally, the owner would use cash reserves to expand the business but they were spent after the sequester to stay afloat and they are still rebuilding them. A loan would give them the capital needed to purchase new machinery needed to make new parts or scale up production while spreading the cost out over time.
Suppliers may also want use debt for cybersecurity compliance. The Department of Defense’s cybersecurity regulations require physical and virtual protect from malicious intruders. This may require the purchase of computers, servers, and other hardware and software specifically designed to be secure. In addition, the room where sensitive data is held must be secured too.
Last, a business may need capital to take their business to the next level, which may include acquiring or merging with another business. Whether it is an increase in sales with new or existing customers, moving into new facilities, or hiring new staff, a loan for business growth can help. When a supplier has its daily operating costs well in hand and a track record of growth, funding from an external provider could be fuel needed to take off.
Learn more about the different financial options and lending sources at our upcoming event, Accessing Capital for Defense Suppliers, hosted by the AMP SoCal Strengthening Competitiveness Program. Register below or learn more by clicking here.
Accessing Capital for Defense Suppliers
Hosted by the AMP SoCal Strengthening Competitiveness Program
Thursday, May 23, 2019
9:00 a.m. – 12:00 p.m.
University of Southern California
Price School Research Centers
3335 S. Figueroa St. Unit A
Los Angeles, CA 9007
Space is limited, register today.