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Slow Payment, Tight Credit Pinning Down Smaller Manufacturers

Written by Super User.

There has been no shortage of struggles over the last two years for the nation's manufacturers, which have absorbed the full brunt of the credit crisis' impact, and difficulties still remain despite government attempts to spur investment. A recent hearing in the Senate Committee on Banking, Housing and Urban Affairs illuminated the various forces still squeezing the sector.

"Small and medium sized manufacturers are often trapped between the troubles of their much larger customers and financial institutions," said Robert Kiener, director of member outreach for the Precision Machined Products Association (PMPA). Kiener was one witness testifying at the hearing, dubbed "Restoring Credit to Manufacturers and called by Sen. Sherrod Brown (D-OH), chairman of the Subcommittee on Economic Policy. Kiener, along with David Andrea, vice president of industry analysis and economics for the Motor and Equipment Manufacturers Association (MEMA), discussed the many ways in which government programs fall short for small- and mid-sized manufacturers (SMMs) and the financial services sector's opinion of the nation's manufacturers that continues to contribute to its difficulties.

"Many banks are not lending to manufacturing businesses because of the fear of having their rating level reduced by federal regulators," said Kiener. "The federal government's policies should not create an environment in which manufacturers struggle to access adequate and timely credit. The nation's economy, in which manufacturing accounts for 12% of GDP, cannot recover without a sound manufacturing base. Returning to sound lending practices with manufacturers is good for their business and critical for the country."

Outreach and loan programs to smaller firms have fallen short in the sector, mainly due to the limitations placed on the amount of money loaned in these programs. "It is not unreasonable for a small supplier to be called on for the investment of $2 to $4 million to assist with t he design, engineering and tooling for a component on a new vehicle program. However, typically suppliers receive payment for this investment after the launch of production through the piece price of the component,' said Andrea. "The supplier might not begin receiving any cash flow on their investment for 12 to 24 months and will not be completely reimbursed until the product ends production in another 36 to 60 months."

"The SBA programs are limited to only $2 million loans," he added. "Since suppliers are expected to fund a great deal of the research and development in the projects, the net worth and loan amounts have limited utility to our industry."

The absence of available credit might not be the sector's greatest scourge though. SMMs are currently pinched both between banks who are tightening up and their own customers who have taken to delaying payment for as long as they can. "Many SMMs need a return to traditional lending, while other companies and their lenders require assurance that their customers will pay their outstanding accounts receivable. While guaranteeing loans is critical to supporting all manufacturers, guaranteeing accounts receivable is particularly important to SMMs requiring an immediate injection of cash to continue operations," said Kiener. "PMPA and other metal working industries are working with the Department of Commerce Manufacturing Council and members of the Administration on such proposals."

"As one of our members said, ‘I pay my employees weekly, my leases every four weeks, my vendors every six weeks and my customers pay me every eight weeks,'" said Andrea. "The need is evident."

Jacob Barron, NACM staff writer

 

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