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Find the right financing vehicle for your manufacturing facility

Author: By Russell David

How does a business in an extremely competitive industry maintain or acquire an advantage over its global competitors? Business managers are not lacking for answers. But they don’t always know how to move from the idea stage to planning, execution and, finally, results.

In the case of manufacturing companies in the wood industry, their competitive advantage often comes from being a low-cost producer (due to superior production efficiencies and reduced costs) combined with the flexibility to manufacture and deliver their products in a short lead time. Competitive manufacturers are also distinguished by having a facility that supports a marketing strategy of being a niche producer of small runs of value-added products, and by being a leader in product innovation.

One critical success factor in achieving a competitive advantage is having the ability to acquire the most modern and efficient machinery, equipment, systems and processes available. But how does a company finance these types of projects? There are many financing alternatives, but deciding on the ideal type of financing in a particular circumstance is not as straightforward as it might seem.

Factors to consider include the type of financing best suited to the investment, including the ideal blend of debt and equity to maximize the return on investment, the source of the financing, and the terms of financing.

The financing alternatives available to companies funding major investments in machinery, equipment, systems and processes include senior debt provided by chartered banks and asset-based lending organizations, subordinated debt, mezzanine debt (or quasi-equity) and equity. Rates vary significantly, as do terms of repayment, financial restrictions and other considerations.

A company may choose to seek additional financing from its banker, or it may look to another bank or financial institution to create a more competitive environment for its financing requirements. Additionally, a manufacturer must consider the financial institution in the context of future investments — the company may need additional capital to modernize the plant or to expand production capacity. Some partners may be more likely to finance subsequent rounds of financing. Certain financial institutions are more willing to finance long-term assets, while others are more interested in financing working capital, such as trade receivables and certain types of inventory.

Companies that require large amounts of capital for major projects may have to seek more patient or strategic capital — often in the form of mezzanine debt or equity, which come from specialized mezzanine funds or private equity funds that invest over longer time horizons. While mezzanine debt and equity are considerably more expensive, they enable a company to fund a strategically important project when traditional bank financing is not available — thus allowing the manufacturer to further develop an important competitive advantage.

In addition to these types of corporate finance, companies should not neglect the role of government in financing Canadian manufacturers. Although government assistance has decreased over the past several years due to deficits and shifting priorities, there remain many programs designed to assist companies in various industries. For instance, the province of Quebec offers tax credits for research and development. There is also a variety of grants, loans, loan guarantees and export grants from provincial and federal bodies. For companies operating in Quebec, there are provincial grants for economic feasibility studies to build and modernize manufacturing facilities. Finally, there are sector-specific loans and grants from Sustainable Development Technology Canada for environmental projects related to plant expansion and modernization.

Canadian companies in the wood industry are operating in a highly competitive global environment. These companies must be niche manufacturers, producing value-added products with flexible manufacturing capabilities, just-in-time delivery and superior customer service. Above all, they must ensure that their manufacturing facilities, systems and processes give them a competitive advantage. Financing alternatives are plentiful — but so are financial blunders. Don’t let your lack of financial expertise restrict your ability to become a wood industry leader. Seek the help of a corporate finance professional who can find the tailor-made options that will give you an edge over the competition.