How Manufacturing Businesses Can Use Lines of Credit

FInance Blog
How Manufacturing Businesses Can Use Lines of Credit

How Manufacturing Businesses Can Use Lines of Credit

December 2, 2020|
FInance Blog|

If your business manufactures products, ensuring that you have sufficient capital to pay for inventory, payroll, and other production costs is probably your top priority. Throughout the year, these expenses can vary significantly depending on demand. Furthermore, your expenses always precede your revenue. So, if you are gearing up for the holiday season, for example, you may need extra funding. A line of credit could help your domestic production business to succeed.

Create a Plan for What You Need

Before you apply for any financing, it is important to know what you may need in the future. The following are some steps you should follow to generate your plan:

Cash Flow Statement: Create your cash flow statement for your business as it stands now. Then, come up with a sales projection and create a pro forma cash flow statement. Anticipate that you will not meet your sales targets and will somewhat exceed your projected expenses.
Working Capital: Calculate your current working capital. This is your short-term assets minus your short-term liabilities. Typically, this means assets that can be liquidated within a few months and liabilities that are due within the same timeframe.
Optimization: Before you start to borrow, examine whether there are any ways you can improve your cash flow. Perhaps you can work on collecting invoices faster or cutting expenses.
Need: Finally, calculate how much additional working capital you may need. Typically, you will want to find a line of credit with a little extra breathing room. This will help you buy supplies and cover other expenses when you need to.

Apply for a Line of Credit

With the above analysis in hand, apply for a line of credit. This is the ideal option for any business producing goods. A line of credit is very convenient because you can draw money into your bank account whenever you need it.

Additionally, it can be available whenever you need extra help with cash flow. If you are careful to always have some emergency room in your credit line, you will be ready for any slow periods or unexpected expenses.

Unlike other types of financing, lines of credit give you a lot of control. You can use it for almost any business expense. You do not need to show the lender what you will be using the money for.