Manufacturing businesses, like many small businesses, face daunting challenges every day. We speak with small businesses all the time and hear about demanding customers, finding and retaining skilled workers, and managing multiple orders simultaneously. But the one thing they all say is at the top of their list of worries is cash flow. When small businesses in manufacturing have to wait on payments, everything grinds to a halt.
Not only is this problem well known, but it is big. My team dug into our data and found that manufacturing small businesses are waiting on an average of $96,409 in unpaid invoices each and it takes them 21 days to get paid. We estimate that this amounts to $69 billion in unpaid invoices across all manufacturing small businesses in the US.
While manufacturing jobs have declined in the United States over the last several decades, 12.3 million Americans still work in the field, according to the Bureau of Labor Statistics. Manufacturers produce everything from beverages, furniture and gasoline to machinery, chemicals and computing equipment. No matter what goods they produce, late payments can severely cripple manufacturing companies. Just like any other business, manufacturers need money to meet their customers' needs, as well as their own. When customers don't pay their bills on time, staying on top of production schedules can get tricky. It can also limit manufacturers’ ability to take on new customers because they lack the cash to buy materials.
The traditional tools available to small businesses to manage their cash flow are inadequate. Banks provide good services to enterprises, but they’re not able to serve small businesses well. They require lots of paperwork and can take weeks to get back to you with an approval. And after all that time spent waiting, banks only approve 23.5 percent of the small business loan applications they receive.
Credit cards are another option. But even business credit cards require a personal guarantee. You personally take on the responsibility for each credit card purchase your company makes. You’d better pay that back when the bill comes due because if you miss a payment that’s a hit to your personal credit, which limits your access to funding in the future.
I believe there’s a better way forward. A new wave of fintech companies (fintech is short for financial technology) are providing working capital for small businesses like manufacturers. Many fintech companies use sophisticated algorithms to underwrite their customers enabling them to approve over 60 percent of the small business financing applications they receive — more than double the bank’s approval rate. Plus, most fintech companies don’t require as much paperwork as banks so you can have your answer in days — if not hours — instead of weeks resulting in a much better experience.
Fintech companies can also provide small businesses with right-sized financing. Whereas banks may struggle to profitably lend less than $250,000, most fintech companies can provide as little as $1,000. While at first blush some small businesses believe that more capital is better, they also end up paying much more in interest on larger loans than they do on smaller ones. Smaller, tailored amounts that meet the need of a specific project can be an excellent way to finance your business without overextending it with burdensome financing.
Of course, as with all financial products, manufactures should go in eyes wide open and read the fine print — when there is some. But they should also think beyond traditional financial tools when gearing up to grow their business. There are new and exciting options available that could be a better fit.
Eyal Shinar is CEO and Founder of Fundbox.