Bouncing Back: Manufacturing Sector is Recovering Despite Lingering Challenges
Supply chain issues and employee shortages are some of the hurdles facing the manufacturing industry in 2021, but that hasn’t stopped the sector from moving back toward growth, which is great news for factors that specialize in this area.
BY: NICOLE MONTRONE, VICE PRESIDENT OF STRATEGIC INITIATIVES, ENGS COMMERCIAL CAPITAL
Throughout 2018 and 2019, the manufacturing industry enjoyed explosive growth, with output reaching record volumes of more than $2.3 billion, according to the North American Manufacturing Association’s annual report. Although 2020 began with high hopes of similar gains, the introduction of COVID-19 and the global pandemic that quickly followed created unprecedented challenges for global manufacturing that continue to ripple through a recovering economy.
As the reality of the impacts of COVID-19 began to set in last March, it left many companies fearing for the worst and holding on to cash in an attempt to become as liquid as possible. Manufacturers drew down the availability on their credit lines and many larger organizations with senior lenders established additional facilities such as true sale lines as a liquidity safety net. In addition, the federal government offered cash assistance in the form of forgivable Paycheck Protection Program loans and Economic Injury Disaster Loans to support businesses as they navigated through the pandemic. This left many companies flush with cash but still uncertain of the future. Shutdowns at factory production sites, reduced employee capacity levels, employee absenteeism and a struggling supply chain made 2020 a year of new challenges for all.
A Recovering Sector
Despite these new challenges, many sectors have continued to thrive. Consumer products, plastics, food processing and medical manufacturing all experienced a robust 2020. The automotive and aerospace sectors experienced a positive trend in Q4/20 that has continued in 2021, as widespread vaccine availability, mask mandates and the lifting of gathering restrictions helped to restart to the lagging U.S. market. The restart has been so robust that the International Monetary Fund revised its growth forecast for the U.S. economy by almost two times, lifting from the initial estimate of 3.4% up to 6% as of July 2021. Today, demand within the manufacturing industry is strong, as consumers and businesses with cash to spare are busy spending. However, increased global buying has created some new obstacles to overcome.
Continuing growth in the manufacturing space driven by high consumer demand has allowed for steady commercial equipment sales and a demand for equipment financing and leasing throughout this year. Additionally, the increasing use of industrial machinery in agriculture, food and beverage, construction, power and energy, aerospace, material handling, metalworking, industrial, automotive and other industries will continue to provide growth in the industrial machinery market. Although there was a minimal dip in equipment sales in 2020, due in part to lower demand because of sweeping stay-at-home orders, the commercial equipment segment began to rebound by the end of the year. In 2021, sales for industrial equipment are increasing despite extended lead times on machinery. Equipment lenders expect a significant spike for new sales in Q4/21 as businesses look to reduce tax liability by writing off large purchases, depreciating them immediately thanks to the Section 179 tax code.
Unfortunately, the increase in manufacturing demand has caused the global supply chain to be strained. Record long lead times for both raw materials and components, shortages of basic materials, a lack of cargo container availability and port delays are causing extended delivery times. The high demand has also caused a rise in material and shipping costs, which has put pressure on profit margins for manufacturers in every industry. Plastic manufacturers, for example, have experienced a doubling in costs for resin due to the pipeline shut down and unusually cold temperatures in Texas earlier this year.
Manufacturers who have made use of buyer-led supply chain finance programs to improve cash flow have had those lines reduced or terminated due to market uncertainty. Invoices that were being paid in 30 days or fewer are now part of 90 to 120-day payment cycles, putting further pressure on a company’s cash flow. Additionally, a shortage of willing and qualified workers has risen, leaving companies scrambling to cover necessary positions while attempting to avoid delays in production time and/or increases in salary costs.
Overall, businesses have had to be nimble to adapt quickly to the changing environment and the new challenges that threaten to derail recovery.
Impact on Factoring
Within the factoring and asset-based lending industry, manufacturing-related challenges have begun to surface. The first half of the year yielded a slowdown in new manufacturing prospects, especially for those who rely on bank referrals. Federal stimulus, regulatory leniency and large loan-loss reserves left over from 2020 have left many banks in no rush to offload under-performing accounts. These factors have also created a more competitive alternative lending environment, causing finance companies to sharpen their pencils on items like eligibility days, advance rates and overall cost and structure while not compromising on risk. This has pushed many secured finance companies to seek to diversify their product offerings and to actively combat attrition while attempting to preserve yield.
Many factors and asset-based lenders that service the manufacturing industry have experienced a reduction in the net funds employed for their existing clients due to supply chain issues, including the lack of component availability and long lead and delivery times. These issues have left many manufacturers with depleted inventory and an inability to fulfill purchase orders and generate receivables. It has also pushed many secured lenders to provide additional support to their manufacturing clients while managing through over-advances.
Commercial banks and more traditional lenders may soon have to take a closer look at their portfolios and begin to transition long-held relationships from traditional lines of credit with financial covenants to more flexible facilities like factoring and collateral focused asset-based lines. This should result in more opportunities for the secured finance community. However, there is concern that many of these opportunities may be difficult to unwind from their current facilities due to UCCs from the Small Business Administration, merchant cash advances and/or out of formula borrowing bases.
Notwithstanding the supply chain issues, all indications point toward an impressive growth trajectory across all industries in the manufacturing sector. Along with it, opportunities for factors and asset-based lenders to provide creative financing solutions will likely abound. While concerns about COVID-19 variants are once again creating uncertainty, the economic markets have already learned many lessons from 2020 and progress can be seen throughout the manufacturing industry.
Nicole Montrone is vice president of strategic initiatives for ENGS Commercial Capital, a member of Mitsubishi HC Capital Group. As a firm believer in the benefits of alternative finance options like factoring and asset-based lending, she has been responsible for assisting hundreds of customers find the funding they need. She can be reached at 205-690-2208 or nmontrone@engscapital.com.