From lower production rates to higher raw material and utility costs, the plastics industry is feeling the effects of the slowing economy. But the slowdown doesn't have to mean putting your growth strategy on hold.
How can companies expand when decreasing credit ratings, lower earnings levels, higher bankruptcy rates, more conservative lending practices and bank consolidations prevent them from getting the necessary funds? Asset-based lending and equity financing — alternatives to traditional bank lines of credit — are more attractive than ever.
Asset-based lending allows companies to leverage solid assets as collateral and includes revolving lines of credit and term financing. Revolving loans are secured by a borrower's accounts receivable and inventory assets that can be drawn down and repaid over time. The lender manages a revolving credit facility and the related collateral to offer the borrower the largest possible loan amount at any given time. Revolvers convert assets to cash, accelerating the cash-flow cycle for all working capital needs.
Term financing is a long-term loan. It typically is secured by and used to finance property, plants and equipment. The financing may be on or off the balance sheet and may include construction financing. Repayment terms can be sized to reflect the expected cash flows from the asset being financed. This flexibility enables a borrower to better manage the cash flows for the business.
Equity financing is a viable option for companies that may not have current access to debt markets, or firms looking for a cash infusion to improve their balance sheets. Typically, the equity investor makes a minority investment in an existing company.
The right minority investors can be of significant benefit to manufacturers, because they are in it for the long haul. Their experience with management teams and business situations provide a reference point for advice. Participation on the board allows a new owner to be close to the business, while not causing major disruption at the organization level. They also can provide benefits beyond the equity, including avenues to extend your current sales channel, access to their knowledge base and contacts, and domain expertise beyond the skills that exist at your company.
Financing companies can offer asset-based lending and equity financing because they are not subject to the same state and federal lending activity and reserve requirements as banks. Accordingly, finance companies can take on a variety of loans and move faster in response to market changes and customer needs.
The economic slowdown is no excuse to push growth goals aside. Innovative solutions are essential for stability and getting ahead.
Jeffrey S. Kolke is industry marketing manager for plastics and chemicals for GE Capital Commercial Finance Inc. Claudia Stone Gourdon is managing director for marketing at GE Capital Structured Finance Group. Jeffrey Melnick is vice president of GE Equity.