- November 6, 2019
- Posted by: David Marshall
- Category: Business, Manufacturing
I’m not a fan of business credit or companies taking out big bank loans in order to buy a piece of equipment. When I was the President of Robroy, I always made sure we had the cash available to purchase machinery, and that there was an ROI to replace what we had spent.
However, there are a few times when it makes sense for a manufacturer to actually borrow money in order to expand. And it’s important that lenders are willing to work with businesses, especially small businesses. Small businesses aren’t always in a position to use their own capital, and they have an added problem of not being big enough for banks to do business with.
George E. Danis, CEO of Plastic Molding Manufacturing, in PlasticsToday.com recently shared how he thought U.S. manufacturing could be restored to greatness if only banks would work with smaller manufacturers. He said:
The important element is that manufacturing businesses require a very high capital outlay and, therefore, it’s very difficult for someone to start a business, finance it and grow economies of scale to induce confidence with customers and vendors, and have the infrastructure needed to be successful.
To remain a manufacturing nation, we need longer payment terms on capital equipment. For example, if we can borrow $1 million and pay Federal Reserve interest rates of less than 0.5% and have a long pay back—say, 10 years rather than five—that will encourage small to medium-sized companies to invest. It’s simple logic to assist manufacturing companies like a lot of our overseas competitors get from government. Manufacturing is the foundation of our economy. As a business owner we have to sign [for loans] personally and pay today’s going interest rate, which is now over 5%. That makes it difficult for us to be competitive with the Chinese or other foreign nations.
And he’s absolutely right. When interest rates are low, using other people’s money to grow your business makes an awful lot of sense. The issue is around the amount you borrow and the interest rates you pay: If interest rates are too high, businesses can’t afford to borrow, and they won’t be able to expand. That means fewer jobs will be created, and companies will need to outsource or purchase products from overseas.
Of course, the reason why businesses take out loans is also important.
In 2019, business debt has reached an all-time high — about $15.5 trillion, according to Forbes. Unfortunately, many businesses that borrowed that money didn’t necessarily put it to good use. They used it for share buybacks, rather than improved technology and machine upgrades.
And if we get a financial hiccup in the economy, all of a sudden, this debt will become very expensive and the companies will have to service it, even as their sales and profits go down.
Yes, as George Danis said, we need better business loan terms and very low interest rates so small businesses can upgrade their equipment and facilities. But they can also buy equipment on a capital lease, also at very low interest rates. It’s really the leasing company that owns the equipment, and at the end of the lease, you can tell the leasing company to take the equipment and get new, upgraded machines, or you can buy the machines for the remaining balance (taking out business loans, if necessary), or even extending the lease until the machine is paid for and you own it outright.
Regardless, we need business banks to be more willing to work with smaller businesses, and to offer affordable interest rates that don’t put business loans out of reach for all but the biggest manufacturers.
I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now I help companies turn around their own business. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.
Photo credit: Jericho (Wikimedia Commons, Creative Commons 3.0)