Manufacturing business loans and finance for UK manufacturers

A manufacturer pays for almost everything before it is paid for anything. It is worth mapping the cycle, because each stage suits a different lender.

1. Capacity. The machine, line or tooling has to be bought, installed and commissioned before it produces a single saleable part.
2. Raw materials. Steel, polymers, timber, ingredients or components are bought on supplier terms that are often shorter than customer terms, and imported materials may need paying before they are shipped.
3. Work in progress. Labour, energy and overhead are spent while goods are half made. Lenders cannot easily lend against a partly finished product, so this stage is usually funded from the business's own cash or a general facility.
4. Finished goods. Stock may sit in the warehouse waiting for a customer's call-off schedule.
5. Debtors. Once delivered and invoiced, customers commonly take 30 to 90 days to pay, and large customers may impose longer terms.

Growth makes every stage bigger at once. A new contract that doubles volume can mean a second shift, more material on order and a larger debtor book, all before the first extra invoice is paid. That is why profitable manufacturers still run short of cash, and why the answer is often two or three facilities working together rather than one large loan.

Companies buying new, unused plant and machinery may be able to deduct the full cost from taxable profits in the year of purchase through full expensing, and unincorporated businesses have the Annual Investment Allowance. Assets bought on hire purchase can generally qualify, while leased assets are treated differently. The difference can change which agreement is cheaper after tax, so ask your accountant before choosing, and see our guide to asset finance and capital allowances.

The Growth Guarantee Scheme from the British Business Bank gives participating lenders a government guarantee on part of certain facilities, including term loans, asset finance and invoice finance. The borrower remains fully liable for the debt, and the lender still makes its own credit decision.

Illustration only, with round hypothetical figures and no rates. A component manufacturer turning over £2 million wins a two-year supply agreement worth an extra £800,000 a year, with payment 60 days after month end. To deliver it the business needs a second CNC machine costing £180,000 and roughly £120,000 more tied up in materials and debtors at any one time.

• The machine goes on hire purchase over a term that matches its working life, with a deposit from reserves.
• An invoice discounting facility replaces the overdraft, so available funding rises as the new customer is invoiced.
• A modest revolving facility covers the first two months of extra wages and materials before invoice funding catches up.

A single £300,000 term loan would have left the business paying for working capital it needs only at peaks, and would not have grown with the contract.

• Stacked security. An invoice finance debenture, a machinery lender and a bank all taking security can conflict. Priority agreements between lenders need sorting early, or completion stalls.
• Contract risk. Borrowing against one large customer's order ties your repayments to that customer's decisions. Check termination and volume clauses before committing to new capacity.
• Personal guarantees. Directors are often asked to guarantee working capital facilities. Read our guide to personal guarantees before signing.
• Funding losses. A revolving facility used to cover persistent margin erosion delays rather than solves the problem. Repricing, cutting unprofitable lines or an HMRC Time to Pay arrangement for a temporary tax squeeze may be better answers.
• Alternatives to debt. Innovation grants, supplier consignment stock, customer-funded tooling and equity investment can all reduce how much needs to be borrowed.