3Center or American Progress | Manuacturing Bonds
Te end resul is ha many low-produciviy, small manuacuring rms adop a sraegy o cuting coss by keeping wages down. Clearly he marke is no always providing herigh incenives or small manuacuring rms o make ecien decisions ha are acu-ally o heir long-erm bene.
Why small manufacturers need capital and lack access today
Manuacuring companies, by heir very naure, require more working capial han rmsin oher indusries. Te reason or his is ha i akes manuacurers a long ime o con- ver heir resources and invesmens ino cash ow hrough sales. Tis means ha manu-acuring rms have much o heir money ied up in invenory and oher pars o heir business or a long period o ime beore i generaes a reurn. For his reason, manuac-uring rms ofen require more working capial han do rms in oher indusries.
Te need or nancing is paricularly acue or small manuacurers a he beginning o he supply chain because hey end o operae a he behes o large, secondary manu-acurers. Due o “jus in ime” supply chain sraegies,
large, secondary manuacurers who exer greaer conrol over he supply chain require ha smaller, primary manuac-urers bear he coss associaed wih soring heir invenory unil he secondary manu-acurer requess hem. Tis reduces coss or larger manuacurers bu resuls in an evenlonger cash-conversion cycle or smaller, primary manuacurers.
Te mos common orm o capial or small manuacurers is deb, such as a line o credior a xed-erm bank loan. radiionally, manuacurers use real esae, business equip-men, invenory, and receivables as collaeral o obain nancing. Te problem is ha boh commercial and residenial real esae remain weak, and prices have ye o sabilizesince he bursing o he housing bubble in 2008. Couple his problem wih he broaderighening o credi and he relucance o banks o lend, and he resul is many smallmanuacuring rms are having diculy obaining he necessary working capial.
While many manuacurers are holding back on heir expansion plans because o heperceived lack o demand rom consumers and businesses in he U.S. and global econ-omy, here are manuacurers ha would expand i hey could. A 2010 whie paper orhe Naional Insiue o Sandards and echnology, which oversees he ManuacuringExension Parnership, noed ha:
Even manuacturers whose revenues, margins, prots, suppliers, and customers areunafected by the downturn in the economy… have ound it impossible to maintaintheir current borrowing base, let alone receive the nancing needed to grow. Tese rmsare being penalized by the devaluation o their property, plant, and equipment.